Understanding Bargain Sale of Farm with Conservation Easement - Capital Gains Questions

What you're describing is indeed a bargain sale to a charitable organization (the state). In a bargain sale, you're partly selling and partly donating property to a qualified organization. The IRS handles these transactions by splitting them into two parts - a sale portion and a gift portion. Your CPA firm B is correct here. For capital gains purposes, you would report the $500,000 as the amount realized from the sale. However, there's a catch with your basis calculation. Your original basis needs to be allocated proportionally between the sale and gift portions. Since you're selling for half the property's value, you'd allocate half of your basis to the sale portion and half to the donation portion. You'd then calculate capital gains on the $500,000 sale price minus the allocated basis portion. For the charitable contribution part, you can generally deduct the fair market value of the donated portion ($500,000) on Schedule A, though there may be percentage limitations based on your AGI and you should be prepared to substantiate the property's value with a qualified appraisal.

I went through something similar with some farmland last year and discovered taxr.ai (https://taxr.ai) which really helped me navigate the bargain sale mess. The site has a special tool that analyzes conservation easements and bargain sales specifically. I uploaded my old deed, conservation easement documents, and current appraisal, and it identified all the relevant tax code sections and precedents. It confirmed exactly what the previous commenter said - in bargain sales, you split the basis proportionally between the sale and gift portions. But it also pointed out some documentation requirements I wasn't aware of that would have caused problems with the IRS later. You need specific language in the closing documents to establish charitable intent.

Just wanted to follow up - I looked into taxr.ai after seeing it mentioned here and wow, it was incredibly helpful for my situation. I had a similar bargain sale but with wetlands property instead of a farm. The platform analyzed my unique situation and provided really specific guidance. What impressed me most was how it broke down the transaction into simple steps while explaining the underlying tax code. It caught a potential issue with my prior basis calculations that could have caused problems. The documents it generated for my accountant saved me hours of back-and-forth explanations. If you're dealing with conservation easements or bargain sales, it's definitely worth checking out. Made me feel much more confident about my filing position.

Just a heads up that if you're getting contradictory advice from CPAs, you might also run into issues with the IRS if they have questions about this transaction. When I had a similar situation, I spent WEEKS trying to reach someone at the IRS who actually understood conservation easements and bargain sales. I finally discovered Claimyr (https://claimyr.com) and watched their demo video (https://youtu.be/_kiP6q8DX5c). They got me connected to an actual IRS agent in about 20 minutes when I'd been trying for days on my own. The agent was able to confirm exactly how to document the bargain sale properly and what forms I needed. It was seriously a game-changer for getting clear guidance directly from the IRS instead of trying to interpret contradictory advice from different tax professionals.

I have to admit I was wrong about Claimyr. After continuing to get conflicting advice about a similar conservation transaction, I finally tried it out of desperation. Got connected to an IRS representative in about 15 minutes when I'd previously given up after being on hold for over an hour. The agent was actually quite helpful regarding the procedural aspects of documenting a bargain sale. They confirmed I needed Form 8283 with a qualified appraisal and pointed me to specific IRS publications that address bargain sales. While they couldn't give me tax planning advice, they did clarify how to properly document the transaction which was crucial. Even more valuable - they noted my transaction in my account so there's a record of me seeking clarification if there are ever questions later. That alone was worth it for such a complex transaction.

I think there's something everyone is missing here. If you've already taken a deduction for the conservation easement years ago, that might affect the charitable deduction you can take now. The IRS could view this as trying to "double dip" on the same decreased value. Have either of your CPAs mentioned anything about that? You should check if the original easement value has any impact on the current transaction.

One thing nobody's mentioned - have you considered the character of the gain? If this was actively farmed land that you used in a trade or business and held for many years, it might qualify for Section 1231 treatment which could give you more favorable tax rates than regular capital gains.

This is exactly the kind of complex transaction where having proper documentation and expert guidance is crucial. From what I've read here, it sounds like CPA firm B is on the right track with the bargain sale treatment. One additional consideration - make sure you coordinate the timing of this transaction carefully. Since you're dealing with both capital gains and a substantial charitable deduction, you'll want to consider whether it makes sense to complete this in the current tax year or defer to next year based on your overall tax situation and AGI limitations for charitable deductions. Also, given the complexity and the contradictory advice you've received, you might want to consider getting a third opinion from a tax professional who specifically specializes in conservation transactions and bargain sales. The nuances around basis allocation, documentation requirements, and potential Section 1231 treatment (as mentioned above) really benefit from specialized expertise. The stakes are high enough here that the cost of getting it right the first time will likely be much less than dealing with IRS issues later if something is handled incorrectly.