What is Your Total Capital Gains Tax Rate?

We have gotten a couple of questions lately about what is the capital gains tax rate on the sale of farm land.  To answer that question requires:

• How long have you owned the land,
• Is there equipment and fixtures attached to the land such as grain bins, fencing, etc. that you have taken depreciation on,
• Is there buildings that you have taken straight-line depreciation on,
• What state do you live in.

Based upon these facts, we can then give you an idea as to what your capital gains tax rate is.

In brief, if you have owned the farm land less than a year, then it is subject to short-term capital gains tax rates which is essentially ordinary income rates.  If you had allocated cost to equipment, farm buildings (20 year life), land improvements, etc., then the depreciation recapture on these items is also ordinary income.  If you had owned a farm house which you rented out and depreciated over 27.5 years, then this is subject to a maximum federal rate of 25%.  The farm land if held for one year or more is subject to maximum federal long-term capital gains rate of 15%.  Then, on top of it, you need to calculate your state capital gains or income tax rate.  Most states tax capital gains as ordinary income, but several states give you a break for the sale of farm land and in many cases, you may pay no state capital gains on the sale of your farmland.

For example, lets assume you bought farm land in Nebraska for $300,000 five years ago.  You allocated $25,000 to fencing and this is fully depreciated.  The rest was allocated to farm land and you are selling it in 2011 for $1 million.  The $25,000 of depreciation recapture is taxed at your ordinary rate.  The remaining $725,000 gain is taxed at a federal rate of 15%, plus the applicable state of Nebraska rate (whatever it might be less any Nebraska capital gains deductions ).

As you can see, the capital gains tax rate can get fairly complicated and you need to discuss this with your tax advisor to pin down what the actual tax might be.