Sale at Fair Market Value
Sale at fair market value is the sale of property for the price a knowledgeable buyer will pay for the land. However, two major considerations should be kept in mind. Most conservation agencies are often unable to purchase land at fair market value as they have insufficient funds available for the buying of land and must be particular about their purchases. Therefore, the opportunities to sell at fair market value are limited. Also, if your land is sold for its full value and has appreciated in value since its purchase, you will be liable for income tax on the capital gain. This can significantly affect your net profit from the sale. However, there are alternatives:
In a bargain sale, a government agency or charitable conservation organization purchases your property for a price less than fair market value. By offering the property at a lower price, you are more likely to find a willing buyer as most land preservation organizations have limited funds.
You can claim a charitable contribution deduction on your income tax for the difference between the bargain price and the fair market value. This deduction, together with the smaller capital gains to be taxed from the reduced selling price, can offset some of the monetary loss caused by not selling at fair market value.
An installment sale allows an agency to purchase property over a period of several 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.
You benefit financially by spreading the income and the taxable gains over several years. The amount of taxable gains depends on whether the land is sold at fair market or not.
Sale with a Reserved Life Estate
If you sell property with a reserved life estate to a landholding agency, you and your family may continue to use the land during your lifetime or their lifetimes. You will have to continue to pay the real estate taxes on the land while retaining use of the property. Capital gains will depend on whether or not the sale is at fair market value.