Vistas And Energy Efficiency For Centuries: Tax Incentives For Land Conservation And Environmental Focus In New Mexico

April 03, 2007

Summary
In 2007, the New Mexico Legislature passed amendments to the Real Property Transfers Tax Credit and enacted the Sustainable Building Tax Credit. Because these tax credits are transferable, they are the virtual equivalent to cash and could serve as an extremely useful income tax reduction product for taxpayers through New Mexico as well as impact our local development approach.

Tax incentives to encourage land conservation
New Mexico's Forty-Eighth Legislature, in its 2007 Regular Session, amplified the economic importance of the family farm and ranch as well as its place in the Southwest for centuries to come. House Bill 990, sponsored by Representative Peter Wirth (D - Santa Fe - 47), and entitled Real Property Transfers Tax Credit modifies the existing Conservation Easement Tax Credit created through NMSA Sections 7-2-18.10 (2003) and 7-2A-8.9 (2003) by increasing the annual tax credit threshold from $100,000 to $250,000 and allowing for transferability of unused credits relating to conservation easement grants occurring on or after January 1, 2008. This Legislation, signed into law by Governor Bill Richardson on April 3, 2007, paves the way for conservation of more open space, and other significant aspects of land preservation. This article shares my experience regarding the conception and advancement of House Bill 990 and points out a few considerations for those contemplating taking advantage of this complex law.

In addition to his land conservation focus, Representative Wirth also during this last Regular Session introduced House Bill 534 entitled Sustainable Building Tax Credit, which was chaptered as part of Senate Bill 463, and awards tax credits for commercial and residential builders who are prepared to join the green building sector. These two Bills share the same, unique tax fundamental in that they can be sold, exchanged or otherwise conveyed to a third party. These laws now join the Rural Job Tax Credit as New Mexico's only laws that allow for transferable tax credits. They further create a new tax credit marketplace and collectively change the landscape of income taxation in New Mexico. Like House Bill 990, the Sustainable Building Tax Credit is very complex and has several, detailed eligibility requirements that are beyond the scope of this article.

Real Property Transfers Tax Credit
The underlying premise of House Bill 990 - preservation of New Mexico's topography and landscape - was the natural motivation fueling significant environmental support, namely from the Nature Conservancy and from the New Mexico Land Conservancy. While I was testifying before various House and Senate committees regarding the Bill, I also noticed significant support from the farming and ranching communities, sitting side-by-side with the land developer and investor communities. It is therefore not surprising that this broadly-supported concept, merging tax cuts with land conservation, prompted a unanimous vote for this big idea, allowing New Mexico to join the ranks of Colorado, South Carolina and Virginia, which also have transferable Conservation Easement Tax Credits.

A conservation easement is an agreement between a landowner and an eligible conservation organization that restricts certain future activities on the land and allows the landowner to maintain the private ownership of the property while permanently prohibiting certain types of development. The restrictions can vary among easements, but all serve to protect the conservation values of the land. House Bill 990 provides economic incentives for private land conservation by enhancing associated tax benefits. This law follows Colorado's innovative strategy of offering landowners a State income tax credit in exchange for a conservation easement on their property. Conservation easements are mixed creatures of both State and Federal law. From a State law perspective, local law determines the requirements for the creation of conservation easements. Federal and State law must be consulted to establish whether a conservation easement grantor may claim a Federal income tax deduction and a State income tax credit.

Open space is not the only kind of qualified conservation activity for which a conservation easement may be eligible for the Conservation Easement Tax Credit. Under House Bill 990, qualified conservation donations include the outright conveyance or partial conveyance of interests in land including preservation of watershed, particular types of agriculture and natural habitat, and historic sites. The tax advantages associated with House Bill 990 will provide incentive for landowners to place conservation easements on their land.

Tax deductions for conservation easements are not new. They have existed at the Federal level since 1976, and several states offer them. But, as of January 1, 2008, New Mexico has one of the most generous state conservation easement tax prgrams in America, offering an income tax credit of 50% of the fair market value of the easement up to a maximum of $250,000 for qualified conservation easement grants. One of the basic requirements for qualification for the Conservation Easement Tax Credit is that qualifying conservation easement grants must satisfy the Federal deductibility requirements prescribed under Section 170(h) of the Internal Revenue Code of 1986, as amended.

These credits are also excitingly flexible. Income-tax credits are useful for those with large annual tax debts, but they may have limited appeal for the New Mexico ranching and farming community. People until now who are land-rich but cash-poor, may now sell these credits at between 80 to 85 cents on the dollar, to a buyer, corporate or otherwise, who pays more in New Mexico income taxes. Regarding transferability, House Bill 990 is very progressive because this sale generates income tax revenue to the State from the credit sale as the seller of the credits will recognize all of the money received in exchange for the tax credit as gain from the sale pursuant to Section 1001(a) of the Internal Revenue Code of 1986, as amended. This mitigates the overall State fiscal impact, and, at the same time, reduces the present State income tax burden on our business community who will buy these credits at a discount.

It is emphasizing that there are more beneficiaries of this new law than just the ranching and farming communities and the buyers of these new and discounted tax credits - the land developer and land investment communities stand ready to profit. Simply put, landholders in New Mexico can grant conservation easements and make money in the process. This law, while potentially offering the land developer and land investment communities significant State subsidies, also presents pitfalls for the unwary.

Aside from the multiple statutory and regulatory requirements that landowners seeking to use this law should consider, as with most new phenomena, there are unknowns, which also should be identified and evaluated as part of any through plan. For example, some transactions are fraudulent, and there is not much in the way of regulation of valuations. Landowners in New Mexico need to realize that the Federal government will most likely examine these transactions. Therefore, in order to legally sustain the tax and economic benefits associated with qualified conservation easement grants, professional advice should be sought and followed.

Landowners contemplating taking advantage of House Bill 990 not only need to consider the Internal Revenue Service, but also need to realize that there are two State regulatory agencies involved with this new tax credit: the New Mexico Department of Energy, Minerals, and Natural Resources and the New Mexico Department of Taxation and Revenue. These government agencies may very well supplement current regulatory requirements for qualified conservation easement grants, and we should expect their active participation in this new marketplace.

Sustainable Building Tax Credit
The Sustainable Building Tax Credit offers a new approach for business owners to receive a tax credit who build green. This so-called green standard refers to high-performance buildings that embrace energy efficiency. The policy basis justifying House Bill 534 is that green building creates environmentally sustainable, economical, productive and healthy construction.

The actual credit is based on the square footage of the entire building as opposed to similar tax constructs in places like Maryland, which correlate the credit to construction costs. It is specifically tied to the U.S. Green Building Council's national standards through the rating system prescribed by the Leadership in Energy and Environmental Design, or LEED for short. The most commonly accepted and widely used green building standards, LEED, awards points to structures in the following six categories: sustainable siting, water efficiency, energy and atmosphere, materials and resources, indoor environmental air quality, and innovation in design. Each structure achieves a LEED certification level, such as silver or gold, based on how many points it scores in each of these categories. House Bill 534 authorizes tax credits commensurate to a particular LEED certification.

Like the Conservation Easement Tax Credit, the Sustainable Building Tax Credit is very complicated. Only New Mexico income tax filers may take advantage of this credit.

The administrative anatomy of the Sustainable Building Tax Credit and the Conservation Easement Tax Credits are similar. Basically, the Department of Energy, Minerals, and Natural Resources and the Department of Taxation and Revenue work together in the issuance of the credit. Departmental notifications and transferability rules exist. And, just like the Conservation Easement Tax Credit, the Sustainable Building Tax Credit is very complicated, and proper planning and analysis is essential to avail oneself of their significant economic benefits.

These new laws can be expected to affect significantly both land use planning and income tax planning in New Mexico. And, while there are legal requirements that must be satisfied, these laws create important lucrative potentials for ranchers, farmers, developers, contractors, and investors, in this State.