Think of a unique piece of property. Maybe it’s a plot of land you own that is situated perfectly to be added to the Badger Mountain trail system. Maybe it’s a charming house or commercial building in downtown Kennewick. Maybe it’s a vineyard in the heart of Red Mountain. If your ultimate goal is to protect that piece of property and preserve it in its current condition, there are several planning strategies to consider that might, incidentally, also yield some compelling tax deductions as well.
Starting with the ultimate goal: protecting the piece of property in its current condition. These strategies are premised on that singular goal. The strategies are not to better utilize the property or make the property more productive. And, the strategies are not intended to necessarily maximize your return either. Focusing on one of the above examples, let’s say that you own a home next to a vineyard on Red Mountain and your main goal is for the vineyard to remain a vineyard for as long as possible. What can you do? In no particular order and not to the exclusion of other options…
Donate the Land to a Charity that Has Your Same Values
If the goal is to preserve the vineyard (in this example), then you (the donor) can seek out a charitable entity (corporation or trust) that has the stated purpose of preserving vineyard or farm property in its current condition as a vineyard or farm. Once found, do a little due diligence to feel comfortable that the charity is going to do the thing that you want: preserve the vineyard. Once comfortable with the potential recipient of the property, you get an appraisal for the value of the property to be donated and donate it to the charity. You might then be able to utilize the donation as a charitable deduction on your tax return based on the value of the property as appraised. The appraisal must generally meet the relevant requirements of Treasury Regulation 1.170A-17(a). As a reminder, the donor gets two benefits: (1) nonrecognition of the gain—meaning that if you instead sold it you may have to pay capital gains on the sale; and (2) a potential deduction for the fair market value of the property contributed to the charity—assuming the charity qualifies as a 501(c)(3).
Gift a Conservation Easement to an Entity (likely Charity) that Maintains Character of Property
Instead of gifting the entirety of the property to a charity, you could gift a piece of the property to a charity. A “bundle of sticks” is the metaphor to help understand property rights. A person can give away one stick (or a few sticks) from the “bundle of sticks” and still maintain meaningful ownership. In this case, you will give an easement that would place a conservation restriction on the entire property.
The easement would typically be given to a charity (again a 501(c)(3)), with the express purpose of maintaining the character or purpose of the property right that you are donating. In essence, you are giving away the right to change the character of the property. Such a gift has value, too. You are donating a right, the value of which is generally the difference between the value of the property if the owner could make changes, and the value of the property if the owner can’t make changes. Using the example above, we return to the vineyard. The owner could donate a conservation easement and the value of the easement then might be the difference between the highest and best use of the property (perhaps commercial property for wineries or gift shops, etc.) and the value of the existing vineyard. The difference is the value of the gift and the corresponding deduction for tax purposes. The same kind of appraisal as above would be required.
Retain a Restriction on Sale or Gift of Property
An owner can also retain an interest in land conveyed. If the owner wanted to sell the vineyard but also have assurance that the character of the property remains unchanged, the owner could choose to convey the land by deed, but retain an enforceable right that the property never be used for any other purpose other than a vineyard. This kind of conveyance would likely reduce the sale price of the property and it would not result in any tax deduction, but it could be effective in preserving the character of the vineyard.
Place Property into Trust
A fourth option is to place the property into a trust. A trust, in general terms, is a vehicle that adds controls to the use and/or distribution of property. Here, the trust would be established to preserve the character of the property in perpetuity. Well, not exactly into perpetuity. Washington only allows trusts to last for 150 years. Here, the owner again would not be entitled to any income tax deduction. But, there is the possibility that the owner could use this trust as an effective estate tax mitigation technique.
* Licensed, not practicing.
The opinions voiced in this material are for general information only and not intended to provide specific advice or recommendations for any individual or entity. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment Advice offered through Cornerstone Wealth Strategies, Inc., a registered investment advisor and separate entity from LPL Financial.