What are Virginia Conservation Tax Credits?
The state of Virginia provides a tax incentive for the owners of undeveloped land to keep that land in its undeveloped state. If the owner of land that meets Virginia’s public conservation criteria decides to retire that land from development in perpetuity, the owner is eligible to receive a credit on their state tax. An appraiser evaluates the land value as if it could be developed and then evaluates the land value again assuming it could never be developed. The owner will receive a tax credit, known as a Conservation credit, for a percentage of the value lost.
Why do I care about Conservation Tax Credits if I do not own undeveloped land?
The state of Virginia allows those individuals that receive Conservation credits to sell their tax credit to other individuals. Tax credits are available for sale through third-party transfer agents and sell at a discount of 10%-15%. For example, an investor may be able to purchase a $1,000 state tax credit for $870. For those investors that have a substantial state tax burden each year, the ability to satisfy their obligation to the state by purchasing discounted tax credits provides an opportunity to earn a significant return on their investment without exposing their assets to the volatility of the stock or bond market. In the previous example, the outlay of $870 has generated proceeds of $1,000 strictly by reducing the amount of state tax owed by this amount. The $130 net savings, in this specific example, represents a 14.9% return on the $870 outlay. Again, this return would be generated without subjecting the principle to the risks of the stock or bond market.
What are the risks involved?
As stated above, the tax credit provided by Virginia is based on a set of appraisals, one assuming the possibility of development and the other assuming no development. The state of Virginia does have the right to contest these appraisals, in which case the tax credit may be revoked. However, the tax credit seller does agree to indemnify the buyer for any loss resulting from a revoked tax credit, including the amount the buyer paid for the credit and any interest or penalty assessed by the state of Virginia.
What if I buy a tax credit that I can not use?
If you purchase a Conservation tax credit that exceeds your Virginia state tax liability, you can carry forward that tax credit. Conservation tax credits can be carried forward for 15 years after they are issued. Investors should be aware that tax credits sold through a transfer agent may be seasoned. For example, a tax credit that is purchased from a transfer agent may have been issued 3 years ago, in which case it can only be carried forward for another 12 years. If a tax credit is not used within 15 years of issue, it will lose its value.
Is a Virginia Conservation Tax Credit right for me?
If you are a resident of the state of Virginia and you typically have a state tax liability when you file your return, a tax credit may be a viable solution for you. If you are taking distributions from your IRA and you have Virginia state taxes automatically withheld from those distributions, the downward adjustment of your tax withholding following the purchase of Conservation credits may be a wise tax strategy. The financial planning professionals at the Legacy Foundation, LLC. are available to discuss your tax strategy and provide advice on whether Conservation credits make sense for your unique situation.
The opinions voiced in this material are for general information only and are not intended to provide specific financial advice, tax advice, or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment Advice offered through Private Advisor Group, LLC, a registered investment advisor and separate entity from LPL Financial.