The sale of a ranch can create significant income tax consequences. If you are considering seling ranch property, you should be aware of several important tax and financial planning issues. Advanced planning prior to a sale is critical to preserve the value of your property.
Various tax rates and treatments apply to the different types of assets involved with the sale of a farm or ranch. It is important you seek direction from your tax advisors when negotiating the purchase price allocations. How you allocate the sale price to the assets of your ranch will determine the amount of taxes you might pay. See the sidebar below for more details.
Visit with your tax professional to make sure your asking price covers your tax burden. There are four ways investors might be taxed on the sale of a farm or ranch:
- Federal ordinary income tax: Taxpayers will be taxed at rates up to 39.6% depending on taxable income.
- Depreciation recapture: Taxpayers will be taxed at a rate of 25% on all depreciation recapture.
- Federal capital gain taxes: Investors owe federal capital gain taxes on their economic gain, depending upon their taxable income. Since a new higher capital gain tax rate of 20% has been added to the tax code, investors exceeding the $400,000 taxable income threshold for single filers and married couples filing jointly with more than $450,00 in taxable income will be subject to the new higher tax rate. The previous federal capital gain tax rate of 15% remains for investors below these threshold income amounts.
- New Medicare surtax pursuant to Section 1411: The Health Care and Education reconciliation Act of 2010 added a new 3.8%^ Medicare surtax on “net investment income.” This applies to taxpayers with “net investment income” who exceed threshold income amounts of $200,00 for single filers and $250,000 for married couples filing jointly. Pursuant to IRC Section 1411, “net investment income” includes interest, dividends, capital gains, retirement income and income from partnerships (as well as other forms of “unearned income”).
Taxpayers must also take into account the applicable state tax, if any, to determine their total tax owed.
The Burden of Selling
As you set the purchase price of your farm or ranch, consider the scope of your farm assets and the taxes you might incur for each category.
Inventory and Supplies:
Crops, fertilizer, etc.
- Taxed at ordinary income rates
- Raised livestock, breeding stock
- Cattle and horses, held greater than two years: taxed at capital gain rates
- Other livestock, held greater than one year, taxed at capital gain rates
- Cost basis is purchase price and depreciation recapture rules apply.
- Purchased or raised livestock, held for sale
- Taxed at ordinary income rates.
- Irrigation systems, swathers, bailers, tractors, etc., are Section 1245 assets. Recapture of depreciation applies.
- Section 121 allows individuals to exclude up to $250,000 of taxable gain from the sale of a principal residence. A married couple filing a joint return can exclude up to $500,000 of gain. Homes owned in a corporation are not eligible.
- Single-Use Property: Section 1245 deprecation recapture applies.
- Section 1250 Property: potential depreciation recapture may apply.
- Gain taxed at capital gain rates.
Source: Drovers, Chris Nolt