In recent years, Colorado has developed and implemented one of the most comprehensive conservation easement (CE) income tax credit programs in the country, reflecting a state policy of incentivizing preservation of lands with environmental, educational, historic, recreational and agricultural significance and value. House Bill 21-1233 (House Bill 1233), which was signed into law by Gov. Jared Polis on June 30, 2021, furthers the state’s conservation goals by clarifying some existing provisions in the statutes governing conservation easements and offering new opportunities to taxpayers who are considering entering into conservation easements within the state. House Bill 1233 is generally applicable to conservation easements donated on or after Jan. 1, 2021.
It’s worth noting that House Bill 1233 passed just after Senate Bill 33 was rejected by the House Appropriations Committee. Senate Bill 33 would have allocated up to $149 million in repayment of conservation easement tax credits for pre-2013 conservation easements, where the state Department of Revenue had rejected the claimed credits based on purported overvaluations of the easements.
Background – Colorado’s CE Program Before House Bill 1233. Colorado provides an income tax credit for the donation of a perpetual “conservation easement in gross” on real property located in Colorado.
A “conservation easement in gross” is a right of the owner of the easement to prohibit certain acts with respect to the property in order to preserve the property’s value for recreation, education, habitat, open space or historical importance. A conservation easement is a voluntary legal agreement to restrict use of a property. Typically, development is limited or prohibited in order to forever protect and preserve conservation values, such as natural habitat, open space scenic views and agriculture, and outdoor recreation and education. The conservation easement is recorded in the public records and is enforced by a holder of the conservation easement, typically a land trust or other governmental entity.
To qualify for the credit, a donation must both meet the requirements of a charitable contribution for federal income tax purposes, and it must be made to a governmental entity or to certain charitable organizations. In addition, Colorado has restrictions regarding which taxpayers may claim a conservation easement in gross, and provisions regarding the operation of the credit in the flow-through (e.g., partnership) entity context.
Tax credits have been documented in the form of certificates issued by the Division of Conservation, which allow a landowner who donates a conservation easement to claim a tax credit on their Colorado state income tax returns. The tax credit is not a tax deduction, but rather a dollar-for-dollar reduction of (credit against) state income tax liability. Prior to the passage of House Bill 1233, for CEs donated on or after Jan. 1, 2015, tax credit certificates have been issued for 75% of the first $100,000 of donated value and 50% of any remaining donated value, up to a maximum of $5 million credit per donation. Credits in excess of $1.5 million are issued in increments of up to $1.5 million per year in future years. One existing feature of the credits is that the donor of a conservation easement may sell or otherwise transfer tax credits.
Changes ‒ Overview. House Bill 1233 makes a dozen substantive changes to Colorado’s conservation easement program, cumulatively reflecting an effort to modernize the statute and increase the economic benefits of entering into conservation easement donation arrangements. The most eye-catching (dare we say, “exciting”?) of these changes for prospective donors of conservation easements is that the bill modifies the formula used to calculate the amount of the conservation easement income tax credit.
As noted above, the statutory formula for determining the amount of an income tax credit for a conservation easement before the effective date of House Bill 1233 set out a tax credit of 75% of the first $100,000 of donated value, and a 50% credit in excess of $100,000, up to a maximum $5 million credit. House Bill 1233 changes this formula for conservation easements donated after Jan. 1, 2021, to a flat 90% of donated value, up to a maximum $5 million credit. This change effectively increases the amount of the credit for CE donations that would not have “maxed out” the credit under the old formula. For example, under the prior law, a donated easement worth $1 million could qualify for a credit worth $525,000; under House Bill 1233, that potential credit has increased to $900,000.
The foregoing is merely a summary of one noteworthy change within a broader bill and does not constitute legal, tax or financial advice. If you have questions about House Bill 1233 or Colorado conservation easements, please contact your legal advisor.