donation of easement

Technical topics regarding tax preparation.
#1
JAD  
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Client is selling land. They want to donate an easement so the land can't ever be developed. They will either make the contribution before the sale or require the donation as part of the sales contract.

Basis of the property is $700,000
FMV of the property is $800,000
FMV of the donation is $100,000

I calculate basis allocable to the donation of $87,500 per Ex 9 of Reg. Sec. 1.170A-14(h)(3)(iii).
Therefore, basis in the property for purposes of the sale is $612,500.

At the end of the transaction, they have a donation of $100,000 but $87,500 more gain than they would have otherwise. The difference in tax rates might be meaningful except that they have an enormous amount of LTCG and qualified dividends. Their existing deductions offset their small amount of ordinary income, so they pay tax at the lower rates. The tax benefit winds up being on $12,500, the difference between the amount of the donation and the increase in the gain.

Agree, disagree? Thanks.
 

#2
lckent  
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Looks right. They'll also need an appraisal. For this type of donation, I would expect $3-10k for appraisal and about 50% increased chance of an audit.
CPA, Retired
 

#3
Pitch78  
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Maybe I am missing something, or just need more info, but this seems a bit tricky. Is the $800,000 the sales price? If so, if the donation is worth $100,000, should not the sales price be $700,000. Or, is the FMV of the property after the donation
 

#4
JAD  
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Thank you both for the replies. Pitch78, I agree with the issue. I thought of asking the client for clarification, but amounts are broad estimates at this point. I was more focused on making sure that my analysis in OP was correct. Thanks again.
 

#5
Nilodop  
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They will either make the contribution before the sale or require the donation as part of the sales contract.. I'm having difficulty with the second way. If the buyer is required to donate an easement, is it even a donation by the buyer? You know, donative intent and all that.

And also, in addition, furthermore, plus, I wonder this. The reason for the donation is said to be ...so the land can't ever be developed. And yet the seller is selling the land, so why does he care? Does he own adjacent land such that the easement benefits him somehow, and if so, does that affect the tax treatment? And even if he were to retain the land after creating and donating the easement, does the fact that the easement is a good thing as to the owner of the land, thereby increasing the value of the land, affect the tax result. If the land was worth $800k pre-easement, is it still worth $800k after? Why should we assume the land value goes down post-easement? Really, I'm just askimg, but dang if the reg. doesn't say just that, but in a lot more detail.

P.S. That example 9 assumes that the easement has a value
... that is determined under this section to have a fair market value of $60,000.
. And the cite for that example is Reg. Sec. 1.170A-14(h)(4).
 

#6
JAD  
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Interesting point re whether the buyer has a charitable donation if there is no donative intent. As for the seller, no she does not own any other land nearby. There is nothing that she owns that will increase in value due to the development restriction. The donation of the easement will decrease the value of the land, which will result in a lesser sales price for her. She feels that her responsibility to protect the land. It is a moral issue for her.
 

#7
Nilodop  
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Under the one where the buyer is obligated to donate easement. I think seller receives 700 sale price against 700 basis, no gain or loss or contribution. And buyer pays 700 plus an assumed liability to "donate" easement minus the actual "donation" so just a straight 700 basis and no contribution.

But someone has to actually create the easement.
 


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