Reducing Capital Gain Taxes On Farmland
Capital gains tax can be assessed upon the sale of real estate if it is used for productive use as an investment or for business purposes. Because farm land is typically used for business purposes, it will be taxed upon the sale.
Fortunately, NCS Exchange Professionals can help you reduce your tax burden when you sell the farm through a tax-deferred §1031 Exchange.
The first step to reducing your tax burden is to negotiate with the buyer. It is important to include a contingency in the contract which obligates the buyer to cooperate with you should you opt to complete a §1031 Exchange.
The second step is to divide your sales contract into two separate parts. One part of the contract should address the sale of your primary residence and the other part of the contract should be regarding the sale of the related agricultural land or acreage.
Next, you will need to begin a §1031 Exchange on the segment of the sales proceeds involving the land used for business purposes -- your farm land.
Land used for a productive use in a business or as an investment meets the requirements for §1031 treatment. By separating the acreage from the private residence, all of the farm land can be defined as having been held for productive use in a business and it will then qualify for tax-deferral under a §1031 Exchange. Lastly, you may utilize the capital gains tax exemption on any dwelling that has served as your primary residence for two out of the last five years. The sum of the exemption is $250,000 for an individual and $500,000 for a couple. Selling your residence and farm acreage in this manner allows you to take advantage of two tax codes, Section 121 and Section 1031.
The capital gains tax exemption on the primary residence will in fact reduce your capital gains tax on that segment of the transaction. However, the §1031 Exchange on the farm land only defers the tax liability pending the sale of the property you acquire through the §1031 Exchange. It is imperative that whenever you are involved in a complex transaction like this that you consult with your tax attorney or accountant.
Fortunately, NCS Exchange Professionals can help you reduce your tax burden when you sell the farm through a tax-deferred §1031 Exchange.
The first step to reducing your tax burden is to negotiate with the buyer. It is important to include a contingency in the contract which obligates the buyer to cooperate with you should you opt to complete a §1031 Exchange.
The second step is to divide your sales contract into two separate parts. One part of the contract should address the sale of your primary residence and the other part of the contract should be regarding the sale of the related agricultural land or acreage.
Next, you will need to begin a §1031 Exchange on the segment of the sales proceeds involving the land used for business purposes -- your farm land.
Land used for a productive use in a business or as an investment meets the requirements for §1031 treatment. By separating the acreage from the private residence, all of the farm land can be defined as having been held for productive use in a business and it will then qualify for tax-deferral under a §1031 Exchange. Lastly, you may utilize the capital gains tax exemption on any dwelling that has served as your primary residence for two out of the last five years. The sum of the exemption is $250,000 for an individual and $500,000 for a couple. Selling your residence and farm acreage in this manner allows you to take advantage of two tax codes, Section 121 and Section 1031.
The capital gains tax exemption on the primary residence will in fact reduce your capital gains tax on that segment of the transaction. However, the §1031 Exchange on the farm land only defers the tax liability pending the sale of the property you acquire through the §1031 Exchange. It is imperative that whenever you are involved in a complex transaction like this that you consult with your tax attorney or accountant.
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