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Chapter 4 - Taxes

It has been said that the only sure things in life are death and taxes; estate planning is about preparing for both. Land is likely one of the most valuable assets in your estate. And due to the historic rise in real estate values, your land’s value may be greater than you think.

The amount and types of taxes your estate may face depend on the value of your land, the form of ownership your land is held in, and how your assets—including your land—are transferred to your family. The goal, of course, is to pass on your assets in a way that meets your family’s goals while minimizing the amount of taxes for which your estate becomes responsible.

A certified public accountant (CPA) is a licensed professional who understands tax codes and specializes in helping individuals prepare tax returns. A CPA can develop and evaluate strategies designed to fulfill your goals while minimizing taxes

Following is a summary of the various taxes that may affect you as a landowner as you move forward with estate planning. Remember that the laws that determine these taxes can change. The descriptions do not represent the law in any particular year but are a simple explanation of the taxes that may be involved when land is transferred between people or generations of a family. Speak with a CPA or a tax attorney who is familiar with land and its conservation for information specific to your situation.

TAX CONSIDERATIONS

FEDERAL AND STATE ESTATE TAXES
These are taxes on your estate if its value exceeds a certain threshold. Federal and state tax thresholds often change from year to year. One opportunity to lower the value of your estate is through land conservation tools.

GIFT TAXES
This is a federal tax incurred on gifts given while you are living. You can give a certain amount per year without triggering this tax. Giving under the taxable limit can be a useful way of transferring ownership or interest in your land slowly while avoiding taxes. If you give more than the limit annually, the excess is applied toward your lifetime gift-tax exclusion. If at any point the gifts you gave during your lifetime, or left in your estate, exceed that exclusion, the donor generally pays gift tax on the excess amounts. Gifts of any amount transferred between spouses are allowed tax-free.

CAPITAL GAINS TAXES
This tax is assessed when you sell capital assets, including land. Capital gains tax is applied to the value that your land and other assets have appreciated to over time. For example, if you bought your land for $50,000 and it is now worth $200,000, the capital gains tax is applied to the increase in your land’s value of $150,000. Placing a conservation easement on your land is one effective way to lower its sale price and therefore the capital gain from the sale of your property. However, the sale of a conservation easement (see page 14) or a bargain sale can also trigger capital gains liability.

FEDERAL INCOME TAXES
This tax is based on your income. Federal income tax can be reduced through a charitable donation, a bargain sale of land, or a conservation easement by providing you with a charitable donation.

PROPERTY TAXES
As land values and assessments increase, local property tax burdens can be difficult for families to meet. Conservation easements and current use tax programs provide opportunities to reduce property taxes on your land.