The primary goal of tax planning is to legally reduce the amount of taxes you must pay. Two ways to accomplish this are by reducing your taxable income and increasing your tax deductions. The way you transfer your land determines if you receive a tax deduction or lower your taxable income. Depending on your financial situation, you may want to spread your tax deduction over several years instead of taking it as a one-time, lump sum deduction.
You can transfer ownership of your land by donating it to a qualified charity that has incorporated under Internal Revenue Service Section 501(c)(3). The IRS allows you to deduct the fair market value of the land at the time of the donation on your income tax return. Your deduction is generally limited to no more than 50 percent of your adjusted gross income, but in certain cases, it might be limited to 20 or 30 percent. If the charity is not IRS-qualified, you cannot take the deduction. You can contact the IRS at 1-800-829-3676 to confirm that your selected charity is on the IRS-approved list.
The IRS allows you to gift your land but limits the amount that is considered tax free. The exemption for 2013 is limited to $13,000 per gift. If the value of the land exceeds $13,000, either you or the gift receiver must pay the tax on the difference. You cannot take a tax deduction for the land you give away, but the $13,000 acts to reduce your taxable income. For example, if your taxable income is $50,000 and you give away a parcel of land worth $10,000, your taxable income is reduced to $40,000.
Charitable Remainder Trust
Creating a charitable remainder trust lowers your taxable estate and gives you a tax deduction. With a charitable remainder trust, you deduct the fair market value of the land over five years instead of in one lump sum. A charitable remainder trust is an irrevocable trust, and the charity acts as the trustee. Should the charity decide to sell the land at a profit, the capital gain belongs to the charity, not to you. In addition, since the land is no longer part of your estate, it is not subject to federal or state estate taxes.
You can take the tax deductions for selling your land. You can deduct the property taxes, insurance premiums and mortgage interest you paid through the date of the sale. Selling expenses, including real estate commissions, the legal fees to prepare the sales contract and transfer documents and the transfer taxes are all tax deductible. If the transaction results in a profit, the deductions help lower the capital gain amount. If you sold the land at a loss, you can use that amount to offset your capital gains. Any unused loss is carried forward to the next tax year.
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