You and your family have worked hard to protect and preserve your equity in your farm. Now that you have decided to sell, you need to work smart to preserve that equity. The strategies listed below are designed to save tax on your proposed sale of your farm and to maximize inheritance for your children and grandchildren.
Various tax rates and tax treatment apply to the different types of assets involved with the sale of your farm. How you allocate the sales price to the assets of your farm will determine the tax you may ultimately pay. There are several ways you may be taxed on the sale/transfer of your farm. For example, depreciation recapture occurs when depreciation expense has been taken on property used in the operation of your farm and then such property is sold. Such recapture rules will operate to convert what is normally a capital gain to ordinary income to the extent of prior depreciation allowed on such property. The recapture rules only apply to a sale of property and do not apply to gifts and inheritances. Further, individuals may owe federal capital gain taxes of either 15% or 20% on their economic gain depending upon their taxable income. Further, the Health Care and Education Reconciliation Act of 2010 added a 3.8% Medicare Surtax on “net investment income.” This 3.8% medicare surtax applies to taxpayers with “net investment income” that exceeds threshold income amounts of $200,000 for single filers and $250,000 for married couples filing jointly. Finally, individuals must also take into account the applicable state income tax . The New York income tax averages around 7%.
Selling highly appreciated (or depreciated) property can result in a large tax bill. Taxes due on the sale may range from 20% to over 50% of the sale price depending on the cost basis of your property and how your property is owned. One way to save on taxes attributable to the sale of your farm would be to use Internal Revenue Code Section 121. Section 121 allows an individual to exclude up to $250,000 of taxable gain from the sale of a principal residence and a married couple filing a joint return to exclude up to $500,000 of gain. To help maximize the amount of tax-free cash you may receive from the sale of a farm or farm containing the personal residence you may wish to include additional acreage with the home.
It is wise to consult with your legal counsel and a qualified tax advisor before selling your farm due to the complexity of the current tax law. You should be able to structure your sale transaction so that you save federal and state tax on the sale. Tax savings mean more money for you and your family.
Mark A. Krohn, LL.M Taxation, CPA and a partner at J&G, is in charge of the Business Law Team and is also a member of the Trust & Estates Team. He can be reached by phone at our Walden, NY office at 866-303-9595 toll free or 845-764-9656 and by email.