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Capital gains on farm sale

Daniel Cohen
UpdatedFeb 19, 2015

Avoid Capital Gains Tax Problems

Will capital gains tax be required if farm 25 acres be sold? we've owned farm for thirty years after inheritance. We're in 15% tax bracket.

Your question about your potential capital gains tax liability leaves out some details I need to answer your question fully. Therefore, I will make some general comments and observations about capital gains taxes and then give you some brief advice.

Capital gains taxes are due when a capital asset is sold for a gain. Examples of capital assets are real estate, stocks, securities, and businesses.

Here are 10 facts about capital gains taxes that I am quoting from the Internal Revenue Service’s (IRS) Web site:

1.     Almost everything you own and use for personal purposes, pleasure or investment is a capital asset.

2.     When you sell a capital asset, the difference between the amount you sell it for and your basis – which is usually what you paid for it – is a capital gain or a capital loss.

3.     You must report all capital gains.

4.     You may deduct capital losses only on investment property, not on property held for personal use.

5.     Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.

6.     If you have long-term gains in excess of your long-term losses, you have a net capital gain to the extent your net long-term capital gain is more than your net short-term capital loss, if any.

7.     The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income. For 2009, the maximum capital gains rate for most people is 15%. For lower-income individuals, the rate may be 0% on some or all of the net capital gain. Special types of net capital gain can be taxed at 25% or 28%.

8.     If your capital losses exceed your capital gains, the excess can be deducted on your tax return and used to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately.

9.     If your total net capital loss is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you incurred it in that next year.

10.   Capital gains and losses are reported on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040.

Your property is a farm. Because the farm could contain both a primary residence and a working business, figuring out what you owe in capital gains taxes, if anything at all, could be quite complex. You may be entitled to use the $250,000 exclusion ($500,000 for a married couple that files jointly) if the farm was your primary residence for two of the past five years. You may need to separate out what part of the farm was used as a residence from the part that was used as business.

You have a complex tax question. The best advice I can give you is to consult with a licensed tax professional that has experience preparing returns that include farm income.  If you file an incorrect return, your potential exposure to a large tax debt is so great that it is imperative for you to speak to a qualified professional.