Get the free booklet >

Joe & Mary Landowner:

Underlying assumptions

  • Property: 100 acres
  • Appraised fair market value: $3,000/acre: $300,000
  • Basis in property: $100,000
  • Annual income: $90,000 (determines their federal and state income tax bracket)
  • Federal income tax bracket: 25%
  • Iowa income tax bracket: 8.98%
  • Federal capital gains tax rate: 15% (flat rate)
  • Iowa capital gains tax rate: 8.98% (tied to state income tax rate)

In other words, Joe and Mary own 100 acres with a fair market value of $300,000. As of early 2006, the couple’s $90,000 annual income places them in the federal and state tax brackets noted above.

During the couple’s ownership, the property’s value has increased substantially. We are assuming their basis is $100,000, meaning they could owe federal and state capital gains taxes on the remaining $200,000 when sold. The federal capital gains tax is currently fixed at 15%, regardless of income. Iowa’s capital gains tax is linked to the individual’s income tax rate. [Note: Iowa’s capital gains tax is waived if the seller has owned the land for at least 10 years and used it for farming. This case study assumes that Joe and Mary do not meet these conditions.]

Tax case study

More Iowans would permanently protect their land’s resources if they believed they could afford to do so. Luckily, federal and state tax laws reward conservation donors for protecting public values like clean air and water, scenic views and habitat.

The following scenario follows a fictional couple, Joe and Mary Landowner, as they explore the financial effects of various protection options. It shows the significant difference between the couple’s before-tax proceeds and after-tax proceeds. Because of these tax benefits, Joe and Mary’s donation is more affordable than it first appears.

Computing the transaction’s pre-tax proceeds

Joe and Mary have decided they don’t want to continue owning their land, so they are exploring the financial impact of three options: a sale at fair market value, a bargain sale and a full donation. If the couple is working with a qualified conservation group, any portion of the fair market value that they discount from the sale price qualifies as a tax-deductible donation to that organization. Bargain sales can be discounted by any percent or set dollar amount, but we’ve selected a 20% discount for this example.

Computing after-tax proceeds

According to Table 1, Joe and Mary donated $60,000 through their bargain sale and $300,000 through their full donation. Many landowners balk at this point, believing they can’t afford such a large donation. However, when Joe and Mary calculate the tax savings associated with each option, their bottom line changes dramatically.

The bottom line

Comparing the bottom line of each table, Joe and Mary’s sales proceeds of $300,000 from the fair market sale decrease to $252,040 after taxes. Meanwhile, the tax savings from the full donation are $101,940.

Before taxes, the two options had a difference in sales proceeds of $300,000, but that difference shrunk to $150,100 after taxes. Similarly, the difference in sales proceeds between the fair market sale and 20% bargain sale is $60,000 ($300,000 - $240,000). However, the difference in after-tax proceeds is only $27,020 ($252,040 - $225,020).

The results are even more dramatic for donors in higher tax brackets—and it can be larger still for Iowans who have a gross taxable estate that’s valued -above the standard exemption. (See pages 37-38 for more on estate taxes.)

While Joe and Mary’s hypothetical case study shows only three of the protection options outlined in this booklet, similar savings can be realized from many of the other options as well. Remember, it is not how much you receive in a transaction. What counts is how much you get to keep after taxes.

The other bottom line

Few conservation donors are motivated solely by tax savings. Most landowners explore conservation options because they want to protect land they know and cherish.

Tax savings simply make it easier to do the right thing.


Table 1: Joe and Mary's pre-tax proceeds
Fair Market Sale
Bargain sale
(20% discount)
Full Donation
Sale Price
$300,000
$240,000
$0
Donated value
$0
$60,000
$300,000
Pre-tax proceeds
$300,000
$240,000
$0



Table 2: Joe and Mary's after-tax proceeds
Fair Market Sale
Bargain sale (20% discount)
Full donation
Sale Price
$300,000
$240,000
$0
Federal capital gains taxes paid (15% tax paid on any sale value over the $100,000 basis. However, in the case of the 20% discount, the basis is proportionately decreased to $80,000.)
-$30,000
-$24,000
-$0
Iowa capital gains tax paid (rate matches your Iowa income tax rate, in this case 8.98%, paid on any sale value over basis)
-$17,960
-$14,368
-$0
Federal income tax savings (25% tax savings for the donated value)
+$0
+$15,000
+$75,000
Iowa income tax savings (an additional 8.98% deduction for the donated value)
+$0
+$5,388
+$26,940
After-tax proceeds
$252,040
$222,020
$101,940



reprinted from Landowner’s Options, © 2007, Iowa Natural Heritage Foundation
Landowner's OptionsINHF logo