Apr 7, 2007

Law: Farmers Receive 100 Percent Tax Credit On Development Rights

This story is the fourth in a series about farmland preservation.

A federal law changed recently, and in California a vineyard owner who worked hard for its passage stepped forward to be one of the first to make use of it.

The law increases tax benefits for farmers and others who donate development rights to their property. Landowners who deed-restrict their land to keep it forever farmland can recover up to 100 percent of the lost development value through income tax credits.

Andy Beckstoffer of Beckstoffer Vineyards, which grows grapes for Napa Valley wineries, made his donation days after the law was signed Aug. 17.

Beckstoffer, who is also president of the California Winegrape Growers Association, donated a conservation easement to the Land Trust of Napa County, an organization qualified to accept such donations.

By the donation, 89 acres of To Kalon Vineyard – a Napa Valley vineyard with a long history – was permanently preserved for agriculture. The donation was announced at a press conference held in the vineyard with Rep. Mike Thompson, D-Calif., one of several legislators working to get the bill through Congress. He, Beckstoffer and Land Trust Executive Director John Hoffnagle all spoke about the need to preserve agriculture as a way of life in Napa County.

Beckstoffer, who has been a leader in the valley in efforts to save farmland from urban development, is a land trust board member.

“I believe conservation easements are one of the most important tools we have for ensuring our farmland is protected from uncontrolled development,” Thompson said.

When landowners donate their property as a conservation easement, they maintain ownership and management of the land, while forgoing their rights to develop it for non-farm purposes in the future. Conservation easements have historically been an effective tool for keeping land in agriculture, and Thompson anticipates the new law will help more farmers donate their land for conservation purposes.

In some states, especially in the East, state-funded purchase of development rights (PDR) programs have taken off. In Pennsylvania, Maryland and New Jersey, millions of dollars have been raised through bond issues and dedicated tax revenues and are being spent by units of government to buy farmland development rights. But most states do not have such programs or, when they do, haven’t funded them.

An alternative way to compensate farmers for protecting their farmland from development is through tax-related incentives, and the new provisions sweeten these. The law applies everywhere, whether states have PDR programs or not.

The tax provision, a rider included in Section 1206 of the Pension Protection Act, expands provisions of the current tax law in two ways:

It raises the cap for such deductions to 100 percent of donor income for ranchers and farmers and 50 percent for all others. The previous cap was 30 percent for all landowners.

It extends the carry-forward period for conservation easement deductions to 15 years from what was previously five years.

The law is retroactive to Jan. 1 but sunsets at the end of 2007. Congressman Thompson’s aide, Anne Warden, said he is seeking to extend it, also the stated goal of the Land Trust Alliance.

Hoffnagle explained how the law works.

Imagine a vineyard owner has a 40-acre vineyard that has potential home sites worth a million dollars, he said. Instead of selling that parcel, he gets an appraisal on the property and donates the development rights. The landowner (assuming he qualifies as a farmer) gets a million dollars in credit against his or her federal income tax and 15 years in which to use it up.

Obviously, the credit works best on profitable farms like vineyards that can generate enough taxable income to use the tax credit.

Besides the income benefits, the donation could be used as an estate planning tool to reduce assets or convert them to cash so heirs need not sell property to divide the value. It could, in some states, result in reduced assessment values for property tax purposes.

In California, where Proposition 13 caps property taxes, there is less incentive to reduce property values to lower tax assessment, Hoffnagle said. But when properties change hands, formerly capped values are uncapped.

Congress approved the new provisions Aug. 5 and President George Bush signed the bill into law Aug. 17.

Beckstoffer’s To Kalon Vineyard is located across Highway 29 from Mondavi-Rothchild’s Opus One in Oakville. Purchased by Beckstoffer Vineyards in 1993, the 89-acre parcel was part of the original 359-acre To Kalon Vineyard first planted by Hamilton Crabb in 1868. In the 1880s, the wines of Crabb ranked among Napa Valley’s top vintages, Beckstoffer said. To Kalon (“the beautiful” in Greek) has continued to produce some of Napa Valley’s most sought-after wines. Today, Mondavi owns 250 acres of To Kalon and the University of California-Davis owns the remaining 20 acres.

“In 1868, Hamilton Crabb planted the first vineyard here,” said Beckstoffer, standing among the vines of To Kalon. “We’re now finishing what he started with our stewardship of the land and a conservation easement that promises to preserve this property to agriculture forever.”

The Land Trust’s Hoffnagle called the provisions of the new law “a significant boost for our conservation efforts” and “a landmark achievement.” He urged other vineyard owners and farmers to donate conservation easements on their Napa County acreage. Currently, 10 percent of Napa County is preserved through the Land Trust. Nine percent of the county is planted to vineyards. The Land Trust has received 46,000 acres since its formation in 1976.

The To Kalon Vineyard conservation easement marks Beckstoffer’s third such donation to The Land Trust of Napa County. In 2003, he announced his intent to preserve the majority of his 1,000 acres of Napa Valley vineyard land through the Land Trust. He has since donated conservation easements on his 44-acre Carneros Creek Vineyard and his 40-acre Beckstoffer Vineyard X, protecting both important vineyards from commercial and residential development.

“It’s not enough to grow great grapes,” Beckstoffer said. “You have to take good care of your people and the environment, and you have to preserve the land.

“This provision does more to preserve agricultural lands in the long term than any currently available zoning laws can. It truly allows us to be better stewards of the land, ensuring our country’s farmland is available for future generations.

“I hope the donation of To Kalon will motivate my friends and neighbors to put their prime vineyard land in conservation easements.”