Defer Your Gain
We had a reader ask us the following question:
“When we sell our farm (that is currently cash rented out) is there any capital gains break if that “gain” is invested with a certain certain period of time.”
When the real estate market was hot several years ago, many real estate investors took advantage of a tax-deferred exchange to defer their income tax on the sale of real estate. Many of these investors rolled their gain over into farm land.
Now that the farm land market is heating up, many farmers may want to lock in their gain and sell their property.
They have two options:
- Pay the income tax at a federal rate of 15% (can be higher for recapture of depreciation on personal property and buildings),
- Defer the gain by rolling the sale of the property into other real estate.
Some sellers are able to do an immediate exchange of property with other taxpayers, however, the substantial majority of sellers take advantage of a tax-deferred exchange by using an accommodator to handle this transaction. An accommodator will hold the funds while the seller finds other property to purchase and then transfer the funds to handle this purchase.
The key dates on this type of exchange is from the date you actually sell the property, you have 45 days to identify the property you want to buy and a total of 180 days to actually purchase the property.
I have many taxpayers call me after selling the property to ask about deferring the gain. I will ask if they used an accommodator and they indicate they have already gotten the cash from the sale. I then have to tell them that they are too late since any time you receive the cash personally, you can no longer defer the gain.
Remember, you must engage the accommodator before selling the property.
Also, you do not have to reinvest the proceeds in other farm land. You can roll over the gain into almost any type of real estate such as apartment buildings, retail, office, etc. If your land has substantial personal property such as irrigation equipment, etc. this gain can not be rolled into real property and may be taxable.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
I have a listing client that has a house and farm that he is getting ready to sell. His understanding is that there is a one-time tax exemption for selling his farm. I can find no information on a tax break. What can you tell me?