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Charitable (or Bargain) Sales for
Land
Conservation
by Mark Robinson, Compact of Cape Cod Conservation Trusts,
Bob Wilber, Kathy Sferra, Massachusetts Audubon Society, and Heather
McElroy, Cape Cod Commission
Charitable sales are an often overlooked method of stretching limited
public and nonprofit land conservation dollars in a manner that can
be advantageous for both the seller and buyer. In general, charitable
sales, also sometimes called "bargain sales," are most feasible
when a landowner is motivated to conserve his or her land. However,
depending on the landowner's financial circumstances and other factors,
charitable sales can often also provide net (after tax) revenue comparable
to a fair market value sale to a non-charitable entity. This achieves
community goals by allowing the land to be protected, while generating
significant revenue and tax advantages for the owner. In some cases,
presenting information on the financial benefits of a charitable sale
may be effective in persuading a landowner to consider this approach
as a sound business alternative to a sale at fair market value, even
when the landowner has already been seriously considering selling the
property for development.
In May 2000, The Compact of Cape Cod Conservation Trusts and the Cape
Cod Commission convened a workshop on Cape Cod for land trusts and municipal
land bank committees to explore the potential tax advantages of charitable
sales. While landowners should always be counseled to consult with tax
advisors when considering a bargain sale, volunteers and professionals
involved in land conservation should be able to go beyond merely suggesting
that landowners investigate charitable sales, and actually help them
work through some examples to show them the potential benefits that
could result from such an approach. Ideally, these examples would be "customized" to reflect the specifics of the landowner's financial
situation. This information can be of assistance in encouraging landowners
who have not previously considered the charitable sale approach, to
determine whether and how a conservation alternative can successfully
"compete" with a fair market value sale with regard to net
after tax return.
What is a Charitable Sale or Bargain Sale?
A "bargain sale" is the term used by the Internal Revenue
Service to describe a sale of land (or interest in land such as a conservation
restriction) for less than fair market value to a non-profit land trust
or government agency when the land is to be used for a public purpose,
including conservation, recreation and water supply. Technically, in
a charitable sale, a portion of the value of the land is sold and a
portion is donated. The relative proportions of the sale and the donation
are determined through negotiation between buyer and seller. The landowner
is able to take a charitable deduction determined by the difference
between the sales price and the appraised fair market value on his or
her income tax return under Section 170 of the Internal Revenue Code,
resulting in tax savings. Landowners often shy away from the term "bargain
sale" as it implies that they are giving away their land for a
"bargain." Hence, many organizations are increasingly using
the term "charitable sale" as it better describes the nature
of the transaction -- a sale to a charitable nonprofit organization
or tax exempt agency -- that results in an income tax deduction.
What are the Benefits of a Charitable Sale?
There are several benefits that may accrue to a landowner from a charitable
sale:
*A charitable deduction may be able to be taken on the landowner's federal
income tax return. The amount of savings will depend on the landowner's
tax bracket. More information on calculating the deduction can be found
below.
*A charitable sale may reduce the capital gains tax that would otherwise
be due on the proceeds of a sale at fair market value. This may be significant,
particularly for properties with high appreciated value and/or low basis.
*If the property has not been listed with a broker, no real estate commission
will be due. Typically, this can be 6% to 10% of the selling price for
undeveloped land.
*For sales to municipalities, no transfer stamps are due upon recording
at the Registry of Deeds. This is $5.70 per thousand of sale price in
Barnstable County.
*Often a land trust or government agency is able to close the deal more
quickly and with fewer contingencies than a developer or other buyer.
This lower level of risk to the landowner may translate into "cash
in hand" more quickly than when land is being sold for development.
Under particularly favorable conditions, a landowner can "break
even" on a charitable sale when compared to the cost of selling
for fair market value. It is clear that the benefits of a charitable
sale will vary depending on a particular landowner's situation. The
only way to know for sure is to "run the numbers" in conjunction
with the landowner and his or her tax advisor. This will determine the
net after tax return from a charitable sale versus a fair market value
sale. Even if the seller does not "break even," the tax advantages
of a charitable sale will always "cushion the blow" on price.
What Information is Needed to Document a Bargain Sale?
The landowner is required to demonstrate donative intent, specifically
that the landowner will receive no special quid pro quo for the charitable
sale. For example, a landowner that receives a development permit in
exchange for the charitable sale, might be making the charitable sale
in order to encourage the permitting agency to look favorably on the
permit. In such instance, the IRS might question the landowner's charitable
intentions.
To help demonstrate donative intent, language should be put in the purchase
and sales agreement to the effect that:
"BUYER acknowledges that SELLER intends to claim this sale as a
bargain sale for charitable purposes and BUYER agrees to sign the property
receipt acknowledgment on Form 8283 for the SELLER's federal income
tax return. BUYER makes no acknowledgment as to the amount of any deduction
claimed by the SELLER."
In order to substantiate the charitable sale, the landowner is required
to have a complete appraisal prepared by a qualified appraiser no sooner
than 60 days prior to the completion of the transaction. IRS Form 8283
must be attached to the landowner's federal tax return and must be signed
by the appraiser, the seller, and the buyer. There are penalties for
overstating the value of a charitable sale to both the landowner and
his or her appraiser. In particular, it is important to document the
fair market value, not just the asking price -- particularly for a property
that has been on the market for some time and may be overpriced.
How are the Potential Tax Benefits of a Charitable or Bargain
Sale Determined?
Any landowner contemplating a charitable sale should consult with a
qualified tax attorney or tax advisor in order to determine how the
tax benefits of a charitable sale will apply in his or her particular
income and tax circumstances. Ideally this should occur as early in
the process as possible.
As noted above, the amount of the charitable deduction is determined
by the fair market value (FMV) of the property minus the sales price.
In general, the deduction for appreciated real property is limited to
30% of the landowners Adjusted Gross Income (AGI). If the full amount
cannot be deducted in the first year, any unused deduction may be carried
forward for five additional years. After this time, any unused deduction
is lost. In addition, total charitable deductions in any one year (appreciated
real property, stock, cash and noncash contributions) are further limited
to 50% of AGI. Both limitations must be respected on any given year's
tax return. Land conservation organizations and agencies that want to "run the numbers" for a landowner need to either obtain information
about anticipated income and deductions from the landowner or clearly
point out the assumptions that are used in the calculations.
Two important factors in determining the ability of a landowner to benefit
from a charitable sale are the basis of the property and the tax bracket
of the landowner. In general, the landowner that will benefit most from
a charitable sale is one that is in a high tax bracket and has a property
with a relatively low basis compared to the fair market value. However,
either one of these conditions (high income or low basis) can serve
as the "engine" that makes a charitable sale work for the
landowner.
The basis of a property must be determined in order to calculate the
capital gain (or loss) that will be reported upon its sale. For land
that was purchased by the landowner, the basis is what the landowner
paid for it, plus the value of any improvements that have been made.
The basis for inherited property is the value on the date of death of
the previous owner plus the value of any improvements. The basis for
gifted property is the basis of the original owner plus any improvements
(the previous basis transfers to the new owner). It is important to
note that charitable sales are treated as part gift and part sale. The
basis needs to divided proportionately between the sale and the donation.
This is shown in the example below.
In some instances, charitable sales are less likely to be attractive
to landowners. These include situations where the owner has no interest
in conservation or is otherwise not motivated to invest the effort to
make a charitable sale work, and cases where a landowner has already
used up their charitable deduction (for example, through donations of
appreciated stock). A charitable sale is likely to be less beneficial
for properties with a high basis or landowners who have little income,
thus placing them in a lower tax bracket. In addition, some corporations
and nonprofits that hold land may not be able to benefit from the tax
advantages of a charitable sale.
An example of the calculation of the tax benefits of charitable sales
is provided below. The worksheet, prepared by The Nature Conservancy,
is for a hypothetical example where the seller, in a 36% tax bracket
would "break even" on a charitable sale of $288,000, where
compared with a fair market value sale of $350,000.
1999 Federal Tax Rate Schedule (Single)
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| Taxable Income |
|
|
|
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| Over |
But Not Over |
Pay Tax of: |
And Marginal Tax Rate
% on Excess |
Of Amount over: |
| $0 |
$25,750 |
$0 |
15% |
$0 |
| $25,750 |
$62,450 |
$3,862.50 |
28% |
$25,750 |
| $62,450 |
$130,250 |
$14,138.50 |
31% |
$62,450 |
| $130,250 |
$283,150 |
$35,156.50 |
36% |
$130,250 |
| $283,150 |
. . . |
$90,200 |
39.6% |
$283,150 |
Capital Gains Tax Rates for 1999
Federal
If you are in the 15% income tax bracket, then the tax rate on your
capital gains is 10%.
If you are in the 28%, 31%, 36% or 39.6% income tax brackets, then the
tax rate on your capital gains is 20%.
State
The capital gains is based not on income, but on the length of time
the property was held. These will be reduced in coming years:
more than 1 year but less than or equal to 2 years: 5%
more than 2 years but less than or equal to 3 years: 4%
more than 3 years but less than or equal to 4 years: 3%
more than 4 years: 2%
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