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1031 Farmland for Primary Residence

Andy Gustafson Updated: 11/15/2011 @ 7:13pm

With the recent increases in farmland values and drop in real estate prices, some smart landowners might consider selling their farm and purchasing a new home. What are the tax implications of these transactions? The answer depends upon such factors as whether the farm has been the taxpayer’s primary residence or not; and whether the taxpayer has intent to purchase new property of equal or greater value. The Internal Revenue Code provides multiple opportunities for taxpayers to maximize their benefits when selling their property including tax deductions on the sale of the primary residence and 1031 tax deferred exchanges.

Primary Residence

Internal Revenue Code Section 121 allows a taxpayer to exclude up to $250,000 ($500,000 for married persons filing jointly) of the gain on the sale of their principal residence given during the five-year period from the sale date, the home has been owned and used by the taxpayer as their primary residence for periods of two years or more. This exclusion is available no more than once every two years. Those taxpayers who don’t satisfy the two-year ownership and use requirements can exclude a prorated fraction of the $250,000/$500,000 deduction given the taxpayer has a change in health or place of employment. Gain is determined by the following two steps:

Step 1

                Original Purchase Price + Improvements = Adjusted Basis

Step 2

                Sales Price – Adjusted Basis – Selling Expenses = Realized Gain

If the realized gain is less than $250,000 (when filing individual federal return) or $500,000 (when filing a joint federal return) there is no tax. If the gain is higher and the taxpayer is in the 25, 28, 33 or 35 percent income bracket, the tax is 15 percent. If the taxpayer is in the 10 or 15 percent income bracket, the capital gain tax may be 5 percent. As always, check with your accountant to confirm the tax consequences.

A principal residence located on the farm can be sold and replaced with a primary residence. Seek guidance from a farm realtor to establish comparable selling prices for the home and farmland.

Tax Impact of Selling the Farm

When selling the farm, there are two types of properties being sold, the land and affixed buildings –real property and equipment or livestock– personal property. Internal Revenue Code Section 1031 allows the taxpayer to defer the capital gains and recaptured depreciation taxes when equal or greater, like-kind real and personal property are replaced within 180 calendar days of the sale.

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