Maine land trusts and government agencies have limited funds for land purchases, but occasionally they acquire properties for long-term conservation. Several techniques help them to stretch conservation dollars while providing some compensation for landowners.
Fair Market Value Sale
Selling land at fair market value to a conservation organization may seem to landowners like an ideal solution, but nonprofit groups rarely can afford such acquisitions. Purchases at fair market value are generally reserved for exceptional parcels that face an imminent threat of inappropriate development.
Many landowners come to realize that a sale at fair market value may not even be desirable. Capital gains taxes and selling costs (such as the realtor’s commission) substantially reduce profits, particularly for landowners in higher tax brackets or for those selling highly appreciated property. Bargain sales typically net less money but can minimize taxes and secure the land’s future.
A bargain sale, where property is conveyed at less than its fair market value, increases the chance that a conservation organization or government agency can purchase it. The landowner and purchasing organization negotiate a mutually agreeable price. While a bargain sale may produce a smaller financial return than a sale at fair market value, the loss can be somewhat offset by tax savings. The difference between the land’s appraised market value and its sale price is considered a tax-deductible charitable donation. For any gift of property over $5,000, the gift’s value must be substantiated by a qualified appraisal to receive a tax deduction.
In an installment sale, the seller agrees to accept a series of payments over time rather than in one lump sum. Installment sales benefit landowners by spreading income and taxable gains over several years, although special income tax rules apply. Installment sales benefit the purchasing organization by providing additional time to raise the needed funds. A less complicated installment sale can be done by dividing the land and selling parcels in stages until the entire property is transferred. As with gifts of undivided interests, the land trust may want an option agreement to confirm that it can acquire the whole parcel.
Option to Purchase
If a conservation organization does not have funds for an immediate purchase, a landowner may choose to give or sell an option to buy the property. Under an option, both parties agree on a sale price and the buyers are given a specified amount of time in which to determine whether or not to exercise the option.
The land cannot be sold to other buyers during the option period, giving the conservation group or agency time to raise the necessary purchase funds.
How a Bargain Sale Affects Federal Income Tax
The tax law treats a bargain sale as being part taxable sale and part charitable donation. The sale is subject to capital gains tax while the charitable donation results in an income tax deduction.
Suppose a couple purchased a farm in 1950 for $20,000 (the basis). By 2003, the farm’s fair market value had increased to $100,000. If they decide to sell their farm to a land trust for a price of $30,000, they can count as a charitable donation the difference between the property’s fair market value and the sale price ($100,000 – $30,000, or $70,000).
*information presented here courtesy of Maine Coast Heritage Trust.