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.
Offering a Bargain Sale
The Ernst Martin family spent three decades enjoying the wild beauty of their land along Lubec’s rugged coast. During summer months, they camped on the undeveloped 154-acre expanse of dense woods and heath. “From the outset, I wanted to keep it as wild as it could be,” the late Ernst Martin once observed. “And I hope that others who come along will do just the same thing.”
Martin approached Maine Coast Heritage Trust to see if it would purchase his land, but the Trust could not pay the market rate. A bargain sale provided Martin and MCHT with a win-win solution. Martin offered the land to the Trust at a price it could afford—less than half the appraised value. He, in turn, realized some financial gain, appreciable tax benefits, and the satisfaction of knowing that his half-mile of bold shorefront will remain open for people to enjoy.
“The land is now in good hands,” Martin noted at the time of the sale. “I myself am not going to last forever, and there’s a lot you can’t take with you. I could have sold it to others, but I wouldn’t have known what had happened to it then. The way the world is moving, I wanted the assurance that it would stay wild.”
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).
The capital gain portion is more complicated. Whereas in a fair market value sale the capital gain is the sale price minus the basis, in a bargain sale the capital gain is the sale price minus a “sale portion” of the basis, determined as follows:
sale portion of basis
value of land
(sale price / value) x basis = sale portion of basis
In this case, ($30,000 / $100,000) x $20,000 = $6,000
The sale portion of the basis, $6,000, is subtracted from the $30,000 sale price to yield a capital gain of $24,000. As a result of the bargain sale, the landowners will receive a deduction for a charitable donation of $70,000 and will owe capital gains tax on $24,000.
Right of First Refusal
If you are not ready to sell your land but would like to give a conservation organization the first opportunity to buy it in the future, you can grant a right of first refusal. This technique allows the organization to match any bona fide offer you receive. As with an option, a right of first refusal does not obligate the organization to purchase the land.
Sale of Other Property Interests
In some instances, a conservation organization or government agency may purchase conservation easements and remainder interests – either at fair market value or through a bargain sale. Bargain sales of partial interests qualify for most of the tax benefits that result from other sales (see the section on selling easements).
Combining Conservation Techniques
At the heart of Cobscook Bay lies Race Point, a rugged 100-acre peninsula that affords critical habitat for seabirds, particularly black duck, teal and goldeneyes. Ed Hawes and Becky Koulouris, who have spent many summers on the point, wanted to protect the peninsula and enjoy use of their cabins, while generating some financial return to provide for retirement.
“This land has been used by wildlife for thousands of years, and by farmers and foresters for centuries,” says Hawes. “We wanted to make sure these historic uses would continue forever and the land would never be developed.”
Working with staff of The Nature Conservancy, Hawes and Koulouris crafted an unusual plan for conserving their property. They retained ownership of 48 acres, including the cabin site and about half the peninsula, donating an easement that retired future development rights to the Quoddy Regional Land Trust. The outer 53 acres, which includes more than 8,000 shorefront feet, were transferred at a bargain sale price to the Maine Department of Inland Fisheries & Wildlife (IF&W).
Funding for the purchase came through a federal grant awarded to IF&W under the North American Wetlands Conservation Act. Such grants are rare, according to Ken Elowe, Director of Resource Management at IF&W: “The high rating that this project received nationally confirms just how unique and important this coastal ecosystem is to fish and wildlife resources.”
Combining a bargain sale and conservation easement allowed the landowners to realize their conservation goals and meet their financial needs. “As our discussions proceeded, it became clear that we couldn’t achieve our shared conservation goals without combining techniques,” explains Tom Rumpf, Director of Land Protection at The Nature Conservancy. “Complex projects like this require creativity and perseverance, but the rewards are worth the extra effort.”