Installment Sale Update
We have gotten some feedback to our installment sale post of yesterday and this post will clarify some of those questions and feedback.
First, if the land being sold is an active part of a schedule F farm business, then it should not be subject to the 3.8% net investment income tax as shown in my example. However, most of the farm operations that we are involved with now have the land in a partnership (LLC or LLP) and cash rent the land back to the active farm business. In other cases, the spouse owns the land and cash rents to the farmer spouse. In these cases, the sale of farm land by the partnership under the IRS Proposed Regulations would most likely be subject to the 3.8% tax.
Therefore, if the sale is made by an active Schedule F farmer with the land titled in their sole ownership, then no 3.8% tax is owed, otherwise the 3.8% is probably owed.
Also, if the farm land includes the sale of grain bins, fencing, roads, etc. that are subject to depreciation recapture, all of this income must be reported in the year of sale. Therefore, in these situations, you would want to get enough cash to cover the taxes owed on this gain and it does not receive the special capital gains tax rate.
As pointed out many times, if you are anticipating selling farm land, make sure to discuss it with your tax advisor before the sale (we have too many discussions after the sale when it is too late to fix problems).
Paul Neiffer, CPA
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.
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