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Land Sale/Donation
Land donated to a land trust for conservation is truly one of the finest legacies a person can leave to future generations. Donating land is often especially attractive to the following types of landowners:
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Landowners with land that has significant conservation value and who do not have heirs, or whose heirs cannot or will not protect it; |
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Landowners with property they no longer use; |
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Landowners owning highly appreciated property, the sale of which would result in large capital gains taxes; |
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Landowners with substantial real estate holdings who wish to reduce estate tax burdens |
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Landowners who would like to be relieved of the responsibility of managing and caring for land that they otherwise treasure. |
Land donation may not be a large financial sacrifice if the land has appreciated a great deal since it was acquired. The value of land donated to a charitable organization can be claimed as an income tax deduction equal to the land's current fair market value. Land donation will also remove its value from an estate, reducing future estate taxes.
It is typical for a land trust to request a financial contribution toward future monitoring and management costs to enable it to fulfill its perpetual obligation to care for the land.
Land trusts and government agencies are sometimes willing, though often not able, to buy conservation land. There are ways to close the gap between the funds the land trust or agency has available and the price of the land. One such way is for the landowner to make a bargain sale in which the land is sold at less than its fair market value. A bargain sale combines the income-producing benefit of a sale with the tax-reducing benefit of a donation. It can also avoid the expenses of a sale on the open market. The difference between the land’s appraised fair market value and its sale price is considered a charitable donation to the land trust and can be claimed by the landowner as an income tax deduction.
A gift to a land trust of land subject to a mortgage is also considered to be a bargain sale. It is treated, for income tax purposes, as though the amount owed on the mortgage was paid by the land trust to the landowner.
Before a donation is made, there should be an understanding between the landowner and land trust on whether the land trust plans to hold onto the land. In some cases, ownership by a land trust may not be the best long-term protection strategy for a property. If private ownership is most appropriate for the property, the land trust may accept the land, place restrictions on it in the form of a permanent land protection agreement, and resell it to a conservation buyer. The land is then protected by the easement, the land trust's management costs are reduced, and the land trust can use the proceeds from the sale for future conservation work.
A landowner can continue to live on the land after it is donated to a land trust if the landowner donated a remainder interest in the property and retains a reserved life estate. The landowner donates the property during his or her lifetime, but reserves the right for them and any other named persons to continue to live on and use the property during their lifetimes. When the landowner, or those the landowner has specified, die or release their life interests, the land trust has full title and control over the property.
A variation on a simple donation of land is the donation of undivided partial interests in the land. In order to increase the charitable deduction resulting from a land donation, landowners sometimes divide a single large donation into several smaller donations by donating a series of fractional interests in the whole property over several years. By donating undivided partial interests, the landowner can tailor the size and number of the charitable deductions to the amounts he or she can use in succeeding years.
Example: Harberts' Working Forest Conservation Easement- Caldwell County, NC
Over the years Congress has tried to reduce the tax burden on family farmers. Recently, Congress created a tax benefit for lands covered by a conservation agreement. Previously, conservation agreements could substantially reduce the value of land assets by eliminating certain development potentials that would otherwise be included in the assessed tax value of the land. Under the Tax Relief Act, up to 40% of the "after easement" taxable value of land may be excluded from the estate. This can be a very significant incentive to place a conservation easement on land where high value property is involved.
Another significant change to the tax law is that the heirs can make the donation of a conservation easement after the death of the landowners. While this post- mortem election may be helpful in certain cases, it is not a substitute for good estate planning now. Donations of easements during a landowner's lifetime have multiple tax benefits, including significant income tax savings.
A forested property on the fringes of an urban area has risen in development potential to be valued at $2 million and is the landowners' primary asset. The landowners donate a conservation easement that eliminates the ability to subdivide the land for residential homes or commercial development, to their local land trust. The value of the easement is 50% of the value of the land, or $1 million. The children inherit the property valued at $1 million. The heirs now can also exclude up to 40% of the residual value of the land, or $400,000. This decreases the inherited value of the estate to $600,000. The current tax law provides for a one-time exclusion of the transfer of an estate up to $675,000. Therefore, the inherited value of the estate is under the exclusion and no estate tax is due.
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