Can I Buy More Land Tax-free
When I Sell a Conservation
Easement?
David A. DeJarnett
In a previous article, I discussed the basic income
tax consequences of the grant of a conservation
easement. I mentioned that a conservation easement
could be donated to the grantee, or sold for fair
value, or sold for less than fair value (known as a
bargain sale).
If you sell an easement for its fair value, you will
recognize taxable gain if your basis in the easement
is less than the sale price. If the easement is entirely
donated, you will be entitled to a charitable deduction
(subject to applicable limits such as AGI) if many
requirements are met. If you sell the easement for
less than its fair value, then you will have taxable
gain and will be entitled to a charitable deduction
if many requirements are met. The requirements
for a charitable deduction will be the subject of
a later article. For now, let me just say that not
every donated easement entitles the landowner to a
deduction, and the landowner must carefully plan.
I certainly understand that many landowners
sell conservation easements to raise cash for many
reasons. If you are selling a conservation easement
to raise cash to buy more land, and you plan
carefully, no income taxes will be due on gain from
the sale of the conservation easement. No income
taxes are due on gain from a sale of a conservation
easement as long as all of the requirements of a
like-kind exchange are satisfied, so careful planning
is necessary to be sure all of the requirements are
met. If you want to avoid income taxes on the sale
by investing in more land, you should engage a
competent tax attorney for assistance.
A key to qualifying a sale of a conservation
easement as part of a like-kind exchange is to sign
an agreement with a qualified intermediary before
the closing on the sale of the easement, and be sure
the closing attorney makes the net proceeds check
payable to the intermediary, not to you. If the net
proceeds check is payable to you, the sale will not
qualify as part of a like-kind exchange. A competent
tax attorney experienced with like-kind exchanges
should be able to help you meet the requirements on
short notice.
Another key to qualifying a sale of a conservation
easement as part of a like-kind exchange is to identify
the new property you want to buy in writing to the
intermediary within 45 days after the closing on
the sale of the easement. That is not a lot of time.
Therefore, you should begin to consider which
property you would buy long before the closing on
the sale of the easement.
The last key I will mention to qualifying a sale of a
conservation easement as part of a like-kind exchange
is to close on the purchase of the new property
within 180 days after the closing on the sale of the
conservation easement.
If you look, you will find many qualified
intermediary service providers on-line. While their
services are necessary and many providers are very
helpful, they are not a substitute for a tax attorney
that you hire and who is responsible for assisting
you to be sure the transactions qualify as a likekind exchange.
David is a partner in the Martinsburg office
of Bowles Rice LLP. He has over 25 years of
experience in advising clients regarding income
and estate taxes, estate planning and land
succession planning. For more information, please
contact David at (304) 263-0836.
West Virginia Farm Bureau News 21