If you own a large a large tract of land, you might become stressed out during tax season. Whether your land creates an income or not, it will come with property taxes and other costs. If you’re looking for a way to minimize these costs or reduce your tax burden, check out these tax-saving strategies for landowners.
1031 Tax Deferred Exchange
If you’re looking to sell your land, but considering buying a similar property elsewhere, then the 1031 Tax Deferred Exchange can help you to avoid or postpone paying the full amount of capital gains taxes. The classic exchange took place between two individuals looking to swap property. Nowadays, it is unlikely that you will find someone who is willing to exchange for the property you want, so you can enter into a delayed exchange (also referred to as a three-party or Starker exchange).
First, you’ll need to find a qualified intermediary to manage the exchange. Once you sell your property, the funds are transferred to the intermediary and you have 45 days to identify the property you want to purchase to complete the exchange. Ideally, you already have a good idea of which property you would like because of the short time window. There are three rules that you can choose from when choosing the property or properties you’re interested in: The Three Property Rule, the 200% Rule, or the 95% exception rule. If you don’t identify the property in the 45 days or you can’t apply one of the rules, the 1031 exchange has failed.
If the new property or properties you’ve purchased exceed your original property in value, your taxes will be deferred indefinitely. If you sell your newly purchased property, you will have to pay both your current and your deferred taxes, unless you do another 1031 exchange. There is no limit on the number of exchanges you can do. Millionacres has a great article that answers some of the most common questions about 1031 exchanges if you want to know more.
If you’re not looking to sell your property but you wouldn’t mind getting a tax break in exchange for a good deed, you can look into conservation easements. If you’re willing to enter into an agreement with a government agency or nonprofit that will allow them to control how the land is used while you retain ownership, this is the perfect tax strategy for you.
Conservation easements are a great option because you can design them to fit your and the recipient’s needs, protect the property from future damaging uses, and receive a federal income tax deduction. You have the choice of either donating or selling the conservation easement. While you retain full rights as well as the responsibilities of maintaining the property, the recipient can monitor the land to make sure that it’s being used in compliance with the easement’s terms. If you do sell your property, all future landowners will be required to follow the conditions of the conservation easement as well, protecting your beloved land forever.
According to the Land Trust Alliance, if you donate a conservation easement, it would qualify as a charitable tax deduction on your federal income taxes. In 2015, the permanent, tax incentive increased benefits to landowners. Now, you can deduct 50% of your income for the year of the donation and an additional 15 years. Ranchers and farmers can deduct 100% of their income for the first year, plus an additional 15 years.
In addition to that, it lowers the property value. This will save you money both on property and estate taxes. Plus, your heirs will be able to exclude 40% of the conservation easement land value from estate taxes as well.
Farming Tax Benefits
On top of the extra benefits farmers and ranchers get with conservation easements, there are other tax breaks you might be eligible for. According to the IRS, if you “cultivate, operate, or manage a farm for profit either as an owner or a tent,” then you’re considered a farmer in the eyes of the law. In North Carolina, there are size requirements depending on use and an annual income requirement of $1000.
Farmers are eligible for a large number of tax deductions. Any business-related expenses, like equipment, supplies, and insurance, are all federal income tax deductions. By working with a professional, you can further deductions by properly using depreciation.
In North Carolina, farmers can even avoid sales tax in some situations. If you qualify by having an income of $10,000 per year, you’re exempt from paying sales tax on farming equipment.
Forest Management Program
North Carolina is eager to encourage proper forest management practices in order to maintain and develop its forest resources. To do this, there are many financial incentives for forest landowners, from cost-sharing programs to tax deductions or credits.
There are many cost-sharing programs available for forest landowners in North Carolina. These programs offer reimbursement payments for a portion of the costs of various expenses relating to the planting of certain species, implementing best management practices, retiring farmland, or contributing to other conservation efforts. Owners can qualify for up to $10,000 in tax deductions for reforestation efforts such as supplies equipment used, and even depreciation.
If you’re producing income from the sale of timber from your land, you may be eligible to qualify for long-term capital gains. You could potentially receive tax breaks through the North Carolina Forestry Present-Use Valuation program which offers tax relief for managed timberland. For this program, you must apply and be approved. There are certain qualifications for the land to be eligible. If approved, your land will be taxed at its present value rather than its market value.
As a landowner, there are many ways that you can save some money through tax deductions, investment strategies, and government programs. By utilizing one or more of these tax-saving strategies, you can save yourself money and even help contribute to conservation efforts in North Carolina.
This article is for educational purposes only. Always consult a professional for information specific to your circumstances.