Luckily, federal and state tax laws reward conservation donors for protecting public values like clean air and water, scenic views and habitat.
The following scenario follows a fictional couple, Joe and Mary Landowner, as they explore the financial effects of various protection options. It shows the significant difference between the couple’s pre-tax proceeds and after-tax proceeds.
Computing the true proceeds
Joe and Mary have decided they don’t want to continue owning their land, which has a fair market value of $300,000. The couple is exploring the financial impact of three options: a sale at fair market value, a bargain sale and a full donation. If the couple is working with INHF or another qualified conservation group, any portion of the fair market value that they discount from the sale price qualifies as a tax-deductible donation to that organization.
Bargain sales can be discounted by any percent or set dollar amount, but we’ve selected a 20 percent discount for this example. Thus, Joe and Mary would donate $60,000 in land value through their bargain sale or $300,000 through their full donation. Many landowners feel they can’t afford such a large donation. However, when Joe and Mary calculate potential tax savings they are surprised at how affordable a donation for land protection can be.
NOTE: We had to make some assumptions about our fictional couple’s land and finances to make these computations. Your results will vary, so always consult a tax professional.
Joe and Mary’s after-tax proceeds
|
Fair Market Sale |
Bargain sale (20% discount = $60,000 donated value) |
Full Donation |
| Sale price (pre-tax proceeds) |
$300,000 |
$240,000 |
$0 |
|
Federal capital gains taxes paid (15% tax paid on any sale over $100,000 basis. However, in the case of the 20% discount, the basis is proportionately decreased to $80,000).
|
-$30,000 |
-$24,000 |
$0 |
| Iowa capital gains tax paid (rate matches your Iowa income tax rate, in this case 8.98%, paid on any sale value over basis). |
-$17,960 |
-$14,368 |
$0 |
| Federal income tax savings (25% tax savings for donated value) |
+$0 |
+$15,000 |
+$75,000 |
| Iowa income tax savings
(Iowa tax credit = 50% of donated value; maximum credit = $100,000)
(Iowa itemized deduction for remaining value of full donation = 8.98% of $100,000)
|
+$0
+$0
|
+$30,000
+$0
|
+$100,000
+$8,980
|
| After-tax proceeds |
$252,040 |
$246,632 |
$183,980 |
|
|
|
|
The bottom line
After Joe and Mary’s tax obligations and benefits are considered, they learn:
- Selling to a conservation agency at a 20 percent discount provides them nearly the same financial return in the end. A $60,000 donation of land value “cost” them just over $5,000. The bargain sale also made it more feasible for the agency to raise the funds to purchase and protect the land as they wished.
- A full donation of the land for conservation actually returned 60 percent of the land’s value to them in the form of tax benefits. The donation was also a much easier and faster way to protect their land, compared to a sale – and they were able to place their family name on the land, creating a family conservation legacy.
The results could be even more dramatic for donors in high tax brackets – and it can be larger still for Iowans who have a gross taxable estate that’s valued above the standard exemption. Read more about estate taxes.
Significant savings can also be realized from Reserved Life Estate donations or Conservation Easements.
***Federal Tax Law Changes
Changes to the tax laws in 2018 have effected federal deductibility of donations when used in conjunction with the Iowa Conservation Tax Credit. The new federal rules require the federal deduction be reduced by the amount claimed for a state tax credit. As an example, a gift value of $200,000, would result in $100,000 state tax credit and qualify for $100,000 in federal tax deductions. And for another example, a gift value of $300,000 would result in $100,000 state tax credit (capped at $100,000) and $200,000 in federal deduction. There are additional nuisances that may be applicable depending on the gift and so donors are HIGHLY encouraged to discuss the tax impact with their tax preparer.
It’s about more than the money.
Few conservation donors are motivated purely by tax savings. Most landowners explore conservation options because they want to protect land they know and cherish. Tax savings simply make it easier.
Explore:
Why protect your land
When to explore land protection
Estate planning with land
Combining options
Joe & Mary Landowner:
Underlying assumptions of this case study
- Property: 100 acres in Iowa
- Appraised fair market value: $3,000/acre: $300,000
- Basis in property: $100,000
- Annual income: $90,000 (determines their federal and state income tax bracket)
- Joe and Mary file an Iowa income tax return
- Federal income tax bracket: 25%
- Iowa income tax bracket: 8.98%
- Federal capital gains tax rate: 15% (flat rate)
- Iowa capital gains tax rate: 8.98% (tied to state income tax rate)
In other words, Joe and Mary own 100 acres with a fair market value of $300,000. As of early 2016, the couple’s $90,000 annual income places them in the federal and state tax brackets noted above.
During the couple’s ownership, the property’s value has increased substantially. We are assuming their basis is $100,000, meaning they could owe federal and state capital gains taxes on the remaining $200,000 when sold. The federal capital gains tax is currently fixed at 15 percent, regardless of income. Iowa’s capital gains tax is linked to the individual’s income tax rate. [Note: Iowa’s capital gains tax is waived if the seller has owned the land for at least 10 years and used it for farming. This case study assumes that Joe and Mary do not meet these conditions.]