The Farm CPA
Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.
Defer Your Gain
Mar 16, 2011
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.