A46-Lancastsr Fanning, Saturday, June 30,1990
high development pressure, as
land values continue to rise and the
difference between “eased value”
and “fair market value” continues
Fto grow.
Selling your conservation ease
ment and then gifting cash or other
A assets may be an excellent tool in
g lowering your taxable estate.
I Don’t forget that as long as the
Rl cash or other assets you bought
I stay in your control, you won’t
aa aH |a H aH aaaa Ma h a, aa ha VC IOWCfCd tllC value Of VOUT
MANAGEMENT
I
TAX IMPLICATIONS
WHEN SELLING YOUR
CONSERVATION
EASEMENT
Alan W. Strock
Extension Agent/
Farm Management
Chester and
Lancaster Counties
(Fifth in a series on farmland
preservation.)
When contemplating selling
your conservation easement, you
have complex decisions and issues
to face. The real estate, federal and
state inheritance, and income tax
implications are very important
factors which you will have to
wrestle with.
The sale of the conservation
easement is a taxable event and the
taxes must be planned for by set
ting funds aside to pay the taxes
when due.
Federal income taxes?
Yes, federal income tax may
take a substantial amount of your
conservation easement payment
up to 33 percent of your profit!
Landowners who sell their ease
ment may elect to receive the pro
ceeds in payments over a period of
up to five years, including a lump
sum distribution at settlement.
When calculating the gain from
the easement sale, one has two
options. One can calculate the gain
like any other sale and subtract the
basis, i.e., purchase price less
accumulated depreciation of your
property from the sale price and
the difference is your taxable gain.
The other option is to reduce the
basis of your property, even down
to zero, by the amount of the ease
ment then have a new basis
upon which to calculate deprecia
tion and gain for any future sales of
real estate.
Remember, this lower basis will
result in higher tax when the farm
is sold. If the original adjusted
basis is greater than the conserva
tion easement payment, you would
pay no federal tax. This option
may be particularly advantageous
to the young farmer whose proper
ty has a high tax basis and has no
plans to sell any land, or to the old
er farmer who has a low tax basis
but plans on passing the farm to the
next generation through his estate,
since the farm will realize a
stepped-up basis at the time of
death for estate evaluation pur
poses. Be sure you or your accoun
tant calculates your income tax lia
bility before you sign on the dotted
line, especially if you gift a portion
of the easement.
Charitable contribution
tax benefits?
You may consider donating a
portion of your easement sale to
lower your tax liability and allow
the county and/or state to purchase
more easements.
If a conservation easement is
willfully sold by the landowner at
an amount that is less that the
appraised value (bargain sale) of
the easement, the landowner may
use the difference between the
appraised value of the easement
and the sale price of the easement
as a federal income tax charitable
contribution deduction.
The charitable contribution
deduction is limited to SO percent
of a person’s annual adjusted gross
income, so plan carefully if you
choose this option. It could, how
ever, substantially lower your fed
eral tax liability.
State income taxes?
State income tax at 2.1 percent
is not overwhelming, but on a tax
able income of $200,000, the state
would still get $4,200 not much
compared to the federal tax bite of
$52,864!
Because the sale involves intan
gible personal property, you would
not be eligible to declare the
income on an installment basis, as
you could for federal taxes, even if
you received the money over two
to five years.
The good news is that if the
property was acquired after May
31,1971, taxable income would be
calculated on a pro-rated basis,
proportionate to the number of
months owned after May 31,1971,
divided by total months owned.
Real estate taxes?
Presently, it is uncertain how the
assessed value of the farm will be
affected by the conservation
easement.
The new assessment (if done)
should be based solely on agricul
tural value, but this has not yet
been tested in Pennsylvania courts.
If it has been a long time since your
farm has been assessed, it is con
ceivable that your assessed value
could rise after the conservation
easement is sold. Your total real
estate taxes will still rise even if
your assessment stays the same
when and if your local millage
rates increase. Before making a
final decision to sell your conser
vation easement, try to get a ruling
from your county tax assessment
office on how your assessment will
be affected by selling your conser
vation easement.
Reassessment is a hot topic in
many Pennsylvania counties and
selling your conservation ease
ment may result in a lower
assessed value, or preferential
treatment, because the value
should be based on agriculture val
ue only. You may still want to look
into the preferential assessed value
provided for in Pennsyania’s Act
515 legislation, “The Pcnnsylvani
a Farmland and Forest Land
Assessment Act of 1974,” or in
Pennsylvania’s Act 319 legisla
tion, “The Pennsylvania Clean and
Green Act,” even if you don’t sell
your easement.
Inheritance taxes?
When planning the transfer of
the family farm, the conservation
easement will limit the IRS valua
tion of the farm to “eased value.”
That is the fair market value of
the farm with the easement in
place. Current IRS regulations
limit the reduction in value of the
property under the farmland spe
cial use evaluation, used for feder
al estate value computation only,
to not exceed $750,000.
The conservation easement may
make this election easier for your
heirs to exercise and result in sig
nificant federal estate tax savings.
Pennsylvania has a different farm
land use valuation that is easier to
take advantage of than the federal
program. Tax savings may be
especially common in areas of
Summary
Be sure to thoroughly research
all your options, especially their
tax implications, before you sell
your farm’s conservation ease
ment. Compare your total tax lia
bility when taking the easement
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(Next issue: Family
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Indiana
Livestock
Bonier City, PA
Thursday, June 28, 1990
Report supplied by PDA
CATTLE 138. SL. COWS STEADY
FEW CHOICE 74.00-75 50, CH. HIGH
YIELDING SEL. & LOW CH.
74 25-75.25, SEL. 68.00-73.50, LOAD
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CHOICE SL. HEIFERS 73.00-76.25, CH.
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BREAKING UT. & COMMERCIAL SL.
COWS 53.00-57.25, COUPLE 58.50,
CUTTER & BON. UT. 50.50-55.00, FEW
HIGH DRESSING 57.25, CANNER & LO
CUTTER 44.00-50.50, YIELD GRADE
NO. 1 980-2489 LBS. SL. BULLS
62.00- COUPLE 68.00 & 68.75.
HEIFERS FEW MEDIUM FRAME NO. 1
515-550 LBS. 70.50-74.00. BULLS
MEDIUM FRAME NO. 1&2 470-710
LBS. 63.75-74.50.
CALVES 105. FEW GOOD
94.50-101.00, STAND. & GD. 90-125
LBS. 70.00-79.00, 60-85 LBS
60.00-70.00, NO. 1 HOLSTEIN BULLS
90-130 LBS. 100.00-145.00, NO. 290-110
LBS. 80 00-100.00, FEW HOL. HEIFERS
75-100 LBS. 87.50-126.00, BEEF CROSS
70-140 LBS. BULLS & HEIFERS
92 50-142.50, COUPLE 167.50 & 180 00.
SHEEP 68. CHOICE 80-110 LBS
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