When we entered the program in 2005, a landowner who donated a conservation easement, was eligible for a tax credit on their Colorado income tax for up to $260,000 (in 2006) and up to $375,000 (in 2007).
The Incentive for Landowners to Put Land into Conservation Easements
So, if the State doesn’t have enough money to buy huge parcels of land from landowners at fair market value in order to preserve all the benefits listed in the previous blog for the rest of us citizens, how can they talk people into donating their land to a land trust and devaluing it? I mean, what would it take for you to donate your valuable land and lose future profits so that I can have a pristine view?
The state decided to give the landowner a tax credit instead of money for their land. Genius! Because as you will see below, even though this will “cost” the state by reducing revenue from taxes, it is not nearly as much as it would cost them to buy the land.
What Is a Tax Credit?
So, what is a tax credit? Instead of buying the land from the landowners, the State offered incentives in the form of tax credits for qualified donations of easements to qualified land trusts. A tax credit, as you probably know, is a dollar-for-dollar reduction in your tax liability. So if you owe $200 in taxes and you have a $200 tax credit, you owe $0 in taxes resulting in $200 extra in your pocket.
So, in about 1999, the Colorado legislature defined conservation easement by statute ((C.R.S. § 39-21-107), along with the other legalities related to them, and set the amount of the tax credit. When we entered the program in 2005, a landowner who donated a conservation easement, was eligible for a tax credit on their Colorado income tax for up to $260,000 (in 2006) and up to $375,000 (in 2007). A 20-year carry-forward for the credit was also adopted, so if you couldn’t use it all in one year, you could carry it forward from year to year.
However, the state legislature realized that many landowners could not use such high credits (dollar for dollar) against their income tax liability. Therefore they made a provision that the landowner could sell the tax credit to someone else in what was an unregulated market. (To put it in perspective, to have an income tax liability of $260,000, a person would have to have taxable income of at least one million dollars.)
The amounts have changed since that time, but my focus in this blog is how the Great Swindle of 2005-2013 happened. But, just to bring you up-to-date, effective January 1, 2015, tax credit certificates are issued for 75% of the first $100,000 of the donated value and 50% of any remaining amounts in excess of $100,000 up to a maximum credit of $1.5 million per donation. (It’s interesting to note that the State keeps increasing the amounts – maybe, just maybe, they really do love the conservation easement program, even though they keep complaining about it at the same time, e.g.,"Audit questions whether donated lands in Colorado are worth nearly $1B in tax breaks," by David Migoya, The Denver Post, 12/7/2016.)
What does all this mean? Many landowners in Colorado are cash-poor but land-rich. They are farmers, ranchers, or people with big dreams who own a parcel of land but are barely getting by. And, because they are cash poor, and may generate very little income in a year, they are also likely to owe very little in taxes. So, the tax credit is basically meaningless to many landowners.
However, the additional provision that the landowner can sell the tax credit to someone else created a whole new ball game.
Selling a Tax Credit
Who would buy a tax credit? The rich, of course -- those who actually have huge tax liabilities. So, say you are rich, and you have a tax bill of $300,000 and you buy a $260,000 tax credit for $208,000 (we’ll get to the math in a bit). You’ve just saved yourself $52,000.
Why would a landowner sell a $260,000 tax credit for $208,000 (about 80 cents on the dollar). Because 1) the buyer is making money on the spread, so there has to be a discount. (Who’s going to pay $260,000 for a $260,000 tax credit? That makes no sense.); and 2) there are middlemen taking cuts; and 3) it’s driven by free market forces – what people are willing to pay in an unregulated market, and at the time we were involved it was about 80 cents on the dollar. It sounds flaky, right? Remember, this is all legal and the state set it up.
Even with the reduction to the landowner, getting 80% of the tax credit instead of 100% still nets the landowner $208,000 in cash in this example (theoretically -- that's not the real net, but we'll get to that later). Not bad, it seems, and he or she still owns her land and can continue to use it just as she always has, and she's done something good for the rest of us citizens of Colorado. That’s good bait.
But, there’s more to the story. Come back in a few days, and I’ll tell you the rest of the story about how landowners got swindled in Colorado. Next up? More bait. © Sharon Cairns Mann
So, if the State doesn’t have enough money to buy huge parcels of land from landowners at fair market value in order to preserve all the benefits listed in the previous blog for the rest of us citizens, how can they talk people into donating their land to a land trust and devaluing it? I mean, what would it take for you to donate your valuable land and lose future profits so that I can have a pristine view?
The state decided to give the landowner a tax credit instead of money for their land. Genius! Because as you will see below, even though this will “cost” the state by reducing revenue from taxes, it is not nearly as much as it would cost them to buy the land.
What Is a Tax Credit?
So, what is a tax credit? Instead of buying the land from the landowners, the State offered incentives in the form of tax credits for qualified donations of easements to qualified land trusts. A tax credit, as you probably know, is a dollar-for-dollar reduction in your tax liability. So if you owe $200 in taxes and you have a $200 tax credit, you owe $0 in taxes resulting in $200 extra in your pocket.
So, in about 1999, the Colorado legislature defined conservation easement by statute ((C.R.S. § 39-21-107), along with the other legalities related to them, and set the amount of the tax credit. When we entered the program in 2005, a landowner who donated a conservation easement, was eligible for a tax credit on their Colorado income tax for up to $260,000 (in 2006) and up to $375,000 (in 2007). A 20-year carry-forward for the credit was also adopted, so if you couldn’t use it all in one year, you could carry it forward from year to year.
However, the state legislature realized that many landowners could not use such high credits (dollar for dollar) against their income tax liability. Therefore they made a provision that the landowner could sell the tax credit to someone else in what was an unregulated market. (To put it in perspective, to have an income tax liability of $260,000, a person would have to have taxable income of at least one million dollars.)
The amounts have changed since that time, but my focus in this blog is how the Great Swindle of 2005-2013 happened. But, just to bring you up-to-date, effective January 1, 2015, tax credit certificates are issued for 75% of the first $100,000 of the donated value and 50% of any remaining amounts in excess of $100,000 up to a maximum credit of $1.5 million per donation. (It’s interesting to note that the State keeps increasing the amounts – maybe, just maybe, they really do love the conservation easement program, even though they keep complaining about it at the same time, e.g.,"Audit questions whether donated lands in Colorado are worth nearly $1B in tax breaks," by David Migoya, The Denver Post, 12/7/2016.)
What does all this mean? Many landowners in Colorado are cash-poor but land-rich. They are farmers, ranchers, or people with big dreams who own a parcel of land but are barely getting by. And, because they are cash poor, and may generate very little income in a year, they are also likely to owe very little in taxes. So, the tax credit is basically meaningless to many landowners.
However, the additional provision that the landowner can sell the tax credit to someone else created a whole new ball game.
Selling a Tax Credit
Who would buy a tax credit? The rich, of course -- those who actually have huge tax liabilities. So, say you are rich, and you have a tax bill of $300,000 and you buy a $260,000 tax credit for $208,000 (we’ll get to the math in a bit). You’ve just saved yourself $52,000.
Why would a landowner sell a $260,000 tax credit for $208,000 (about 80 cents on the dollar). Because 1) the buyer is making money on the spread, so there has to be a discount. (Who’s going to pay $260,000 for a $260,000 tax credit? That makes no sense.); and 2) there are middlemen taking cuts; and 3) it’s driven by free market forces – what people are willing to pay in an unregulated market, and at the time we were involved it was about 80 cents on the dollar. It sounds flaky, right? Remember, this is all legal and the state set it up.
Even with the reduction to the landowner, getting 80% of the tax credit instead of 100% still nets the landowner $208,000 in cash in this example (theoretically -- that's not the real net, but we'll get to that later). Not bad, it seems, and he or she still owns her land and can continue to use it just as she always has, and she's done something good for the rest of us citizens of Colorado. That’s good bait.
But, there’s more to the story. Come back in a few days, and I’ll tell you the rest of the story about how landowners got swindled in Colorado. Next up? More bait. © Sharon Cairns Mann
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