Sale at Fair Market Value
Sale at fair market value is the sale of property at the price a knowledgeable buyer would pay for the land. Most conservation organizations are not able to purchase land at full value due to the high cost of land and insufficient funds. If the land is sold at full value and has appreciated in value since its purchase, the seller will be liable for income tax on the capital gain. This can affect the net profit from the sale. There are no charitable deductions associated with a sale at full value.
Many Cape Cod towns have purchased open space at fair market value, owing to the intense competition for land during the development boom. A land trust has almost never paid full value for land. The Windmill Meadows purchase in Brewster for $145,000, at the peak of a real estate boom of 1988, is one exception. The seller realized no tax deductions.
Bargain or Charitable Sale
A bargain sale is part donation and part sale to a government agency or non-profit organization. A bargain sale may entitle the seller to an income tax deduction for a charitable contribution and to a reduction in capital gains tax. The value of the income tax charitable contribution for the seller equals the difference between the fair market value and the lower negotiated selling price for charity. The net cash to the seller at the bargain price may approximate the fair market sale when the tax deduction is taken into account.
Capital gains must be calculated on the sale part of the transaction. A gain is recognized if the property is sold for more than its basis (the basis is usually equal to the original cost, plus improvements and minus depreciation). For bargain sales, the basis of the property must be allocated proportionately between the part sold and the part donated. The income tax charitable deduction from a bargain sale could be greater than the capital gains tax liability that results from the sale at fair market value.
In the 1990s, the Truro Conservation Trust purchased six acres of beachfront land for $200,000; the Orenda Wildlife Land Trust purchased 28 acres of land in Brewster at less than $5,000 per acre; and the Chatham Conservation Foundation purchased 23 acres along Goose Pond for $382,000. All of these purchases were paid for through private fundraising. In each case, the seller received substantial tax deductions for selling below full value to a charity.
An installment sale allows an agency or organization to purchase property over a period of years. The use of the land and the responsibility for payment of property taxes until the sale is complete are negotiable terms of the agreement. The seller benefits financially by spreading the income and the taxable gains over several years. The amount of taxable gains depends on whether or not the land is sold at fair market value.
The Bourne Conservation Trust has successfully used this technique to buy many parcels. In a few cases, the sellers arranged financing by “taking back” mortgages, enabling the land trust to raise money and pay off the purchases over time.