TAX
BENEFITS
OF DONATING LAND
While a majority of Placer Land Trust's projects involve donations of conservation easements, some landowners have elected to donate their property outright. In a few cases, they have reserved a life estate for themselves and their spouses. If the donated land has conservation value, Placer Land Trust will place an easement on the property before it is sold or reconveyed. This summary describes the tax benefits associated with a gift of land. Placer Land Trust has prepared another summary describing the tax benefits of a gift of a conservation or agricultural easement.
General Principles
There are a number of general principles which apply to gifts of land. The
first is that in order to be deductible for income or estate tax purposes,
the donation must be given to a qualified 501(c)(3) organization. Placer
Land Trust meets this requirement. The second is that with a few limited
exceptions, the donor must give up his or her entire interest in the property.
The retention of any substantial property interest could defeat the deduction.
The exceptions which are allowed are:
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The donation of a qualified conservation easement (described in a separate summary).
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The retention of a life estate in a personal residence or a farm, or a conservation property which meets the criteria for donations of conservation easements.
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The donation of an undivided (percentage) interest in property. This technique is sometimes used when a donor wants to spread the deduction for a gift of land over many years and is usually accompanied by a pledge agreement to gift the entire property by a certain date.
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The IRS may ignore a reserved interest that is considered "de minimus" ("the right to picnic on the land once a year," for example). However, the safer practice is to exclude all reserved rights that do not fall within one of the exceptions.
The third general principle is that, because a gift of land almost always has a value of more than $5,000, the donor must obtain a qualified appraisal in order to claim a tax deduction. The appraisal must be prepared by an independent, qualified appraiser and must contain certain factual information specified by IRS regulations. The donor must file a summary report (IRS Form 8283), signed by the appraiser and Placer Land Trust, with the donor's federal income tax return. For more information on these requirements, please consult a trusted financial advisor.
Finally, if the land has appreciated in value, the donor's income tax deduction
is limited to 30% of the donor's Adjusted Gross Income in the year of the
gift. If the gifted value exceeds the 30% limit, the donor may carry over
the unused deduction for up to five years.
Income Tax Benefits of a Gift
of Land
When a gift of land meets the requirements described above and the value
is established by a qualified appraisal, the donation will be deductible
against the donor's federal and, in some cases, state income taxes. This
deduction can mean substantial tax savings.
For example, suppose a California resident who has an adjusted gross income (AGI) of $70,000 donates land to Placer Land Trust valued at $100,000. Under the 30% rule, the donor can claim a charitable deduction of $21,000 ($70,000 x 30%) in the year of the gift. If the donor's income remains constant, she may take an additional deduction in each of the next three tax years, and a final deduction of $16,000 in year five. In summary:
30% Limitation: 30% of $70,000 AGI = $21,000 per year
Thus, the charitable deduction in:
Years 1 through 4 is $21,000 per year, or $84,000
Year 5 is $16,000 ($100,000 total gift less $84,000)
Cumulative deduction over five-year period: $100,000
Assuming the donor is in a 35% combined federal and state income tax bracket,
the total tax savings from this gift of land would be approximately $35,000
over the five-year period.
Income Tax Benefits of Gifting
a "Remainder Interest"
If a donor retains a life interest in a residence, farm or qualified
conservation property, the donor may still take a deduction for the value
of the "remainder interest" gifted to the charity. The value of
the remainder interest is determined from the IRS actuarial tables and is
based primarily on the number and the ages of the life interest holders.
In general, the fewer the life interest holders and the older they are,
the greater the amount of the deduction. For example, a single woman (age
75) who owns a house and 100 acres of agricultural land will be able to
deduct 53% of the property's value if she donates a remainder interest.
If she is married and her husband (aged 80) will also have a life interest,
the deduction would be only 45%. In contrast, if both spouses are 60 years
old, the deduction would be just 20% of the property's value. Thus, the
variation in the amount of the available deduction is a function of the
age and number of life tenants.
Estate Tax Benefits
There is no limit on the amount of a charitable deduction for estate
tax purposes. If a person bequeaths a tract of land to Placer Land Trust
through a Will or Living Trust, that property is ignored entirely in calculating
the federal estate tax. Because estate tax rates run as high as 55%, the
estate tax savings can be significant.
If a bequest of land is made subject to a life estate for one or more heirs
who survive the donor, then only the value of the "remainder interest"
is deductible for estate tax purposes. (If the life tenant is a surviving
spouse, the entire value of the property is exempt from estate taxes.) The
percentage values for the life interest and remainder interest are calculated
in the same manner as for a lifetime donation of a remainder interest.
Property Tax Benefits
When a donor makes an outright gift of land, Placer Land Trust is responsible
for any property taxes which accrue against the property after that date.
If the property is subject to one or more life interests, however, the life
tenants are responsible for payment of the property taxes. In addition,
the life tenants must maintain adequate insurance coverage and keep the
property in good repair until full ownership passes to Placer Land Trust.
Disposition of Gifted Property
Most donors who gift land to a land trust do so without restricting
the property's use. This approach maximizes the donor's income or estate
tax benefits. If the property has conservation value, Placer Land Trust
may place a conservation easement or deed restrictions on the land prior
to its resale, to ensure its conservation values are permanently protected.
Placer Land Trust usually discusses the terms of the easement with the donor,
or the donor may prepare a letter expressing his or her desires regarding
the disposition of the property. The final decision is generally left to
Placer Land Trust.
In many circumstances, Placer Land Trust will not retain long-term ownership
of gifted land. First, Placer Land Trust believes in the benefits of private
land ownership and management and usually prefers to hold only a conservation
easement to protect the resource values. Second, Placer Land Trust does
not have the staff or financial resources to manage all the lands it has
been gifted or may receive in the future. Third, the sale of gifted land,
appropriately protected, helps Placer Land Trust build the endowment and
other funds necessary to protect more land over the long term.
Conclusion
This document summarizes complex federal and state laws. A summary of
these laws must, by necessity, be an over-simplification. Placer Land Trust
can provide more detailed information about the tax laws affecting gifts
of land and can often prepare preliminary calculations of the tax benefits.
However, it is essential that the landowner seek independent legal and tax
advice before finalizing any land conservation transaction. This will ensure
that the donor fully understands the nature of the transaction and what
the anticipated tax benefits will be.
It is also important that the donor consult with Placer Land Trust prior to making a gift of land or executing a Will to make a bequest of land. This ensures that Placer Land Trust not only understands what the donor's objectives are, but it allows Placer Land Trust to make a hazardous waste assessment and take other steps that are necessary before it can accept the gift.
Charitable gifts of land can have an enormous impact upon the growth and
success of Placer Land Trust's conservation program.
 Placer Land Trust 11521 Blocker Drive, Suite 100 Auburn, CA 95603 (530) 887-9222 info@placerlandtrust.org |