Let's say you've lived in your town for many years. You chose the area for its rural character, and the house because it's surrounded by land. Now your children have grown up and moved, and you don’t need so much space, indoors or out. Whether you intend to downsize or stay on for the foreseeable future, you’d like to “give back” something to a town that has given you and your family pleasure.
If you’ve got more land than is required to meet the minimum lot-size requirements in your zoning district, why not consider a gift of land to the town, or to a nonprofit agency that specializes in the preservation of open space, like forests or wetlands or farms?
Making gifts of land can be highly gratifying. People who have lived in a small city, town, or other municipality tend to care deeply about where they live.
A gift of land is an effective and often inexpensive way to ensure that a town’s most appealing qualities will survive well into the future. Permanently protected open space provides many positive recreational, educational, and aesthetic benefits.
It also prevents negative impacts, like unattractive residential or other development. If your land abuts existing conservation land, or contains environmentally sensitive areas, like wetlands, or endangered habitats, like vernal pools, or even aesthetically pleasing views, the benefit of your intended gift will be especially high.
Apart from avoiding paying more taxes on the land you want to give away, tax benefits are the primary financial reason for making a gift of land to a town or to a nonprofit organization that specializes in the acquisition and preservation of open space.
It’s unusual for a state or municipality to pay for open space. Instead, people make gifts of land to a town or to a nonprofit land preservation agency because the value of such a gift is tax deductible.
For tax-deduction purposes, you can choose to value your gift land at its initial purchase cost, or at its appreciated market value.
Choosing to value your gift land at its initial net cost to you is easy to document and does not require an appraisal.
If, for example, your house and ten acres of land cost $500,00 together, the house is valued at $300,000 and the land at $200,000, and you want to make a gift of four of your ten acres of land at basis, the value of your gift will be 4/10 times $200,000, or $80,000, adjusted by transaction and other costs. (See Determining Your Home's Tax Basis.)
If, however, the land is a capital asset in your hands (which it is if you acquired the land with your house), you can elect to value the gift at its market value, which, if you’ve lived in your house for a long while, may be substantially greater than its cost basis.
You'll need to get an appraisal done in order to demonstrate the market value of the proposed gift property. The appraisal, in turn, may entail additional engineering, surveying, and legal costs.
However, the tax benefits from making a gift of land with a substantial market value could be significant. For example, if the land you propose to give away could, theoretically, be subdivided into a number of building lots, and if the market value of each of those lots would be $100,000, the market value of your gift will be much higher than its $80,000 cost value.
You might conclude that the cost of demonstrating that your land is developable into a number of building lots is well worth the cost of soils tests, surveys, and other engineering and legal costs required to support an appraisal.
Valuing a gift of land at cost is straightforward, easy to document, and rarely involves engineering or legal expenses. Valuing a gift of land at its market value is more complicated and less certain, but may have a significantly greater return.
You’ll want to consult a civil engineer who specializes in land development and an appraiser who has experience with substantiating the value of gifts of land as you consider whether to make such a gift and, if so, how to value it.