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:: Farmers Audit Techniques Guide - Chapter Three - Farm Sale
Farm
Sale
Selling a farm
involves disposing of both
business and non-business
property. Land, machinery,
livestock, and other assets used
in farming are business
property, while the farm
residence is non-business
property. For each type of
property, the tax treatment is
different. Gains and losses may
be either capital or ordinary
depending upon the asset.
Farmers are
eligible to exclude the gain on
the sale of the personal
residence under the following
conditions:
-
The
farmer (taxpayer) has
owned and used the home
as his/her personal
residence for at least 2
of the last 5 years.
-
The
farmer has not used the
exclusion in the last 2
years.
-
The
gain on the residence
does not exceed $250,000
($500,000 on a joint tax
return). IRC § 121.
A loss on the
sale of a farm residence is
personal, and therefore, is not
deductible. Although not
conclusive, provisions in the
contract of sale may be evidence
as to the value of the
residence, particularly if the
transaction is between
non-related parties. Also note,
when the underlying farm land is
sold and the principal residence
is retained and the house moved
to another lot, the gain
realized on the land where the
house was originally located is
not excludable.
Land adjacent
to the personal residence and
not used in farming is
includable as part of the
personal residence. The amount
of land that can be allocated to
the personal residence has been
the subject of court cases and
should be researched for current
guidance.
The sale of
unharvested crops with a farm
reduces the tax obligation for
some farmers, since the crops
acquire capital gain status (See
IRC § 1231). To qualify for
capital treatment the
unharvested crops must be sold
with the land and meet the
following requirements:
-
Land
must have been held more
than one year and be
used in the taxpayer’s
business of farming.
-
The
crop and land must be
sold at the same time
and to the same person.
-
The
seller does not retain a
right or option to
reacquire the land,
unless this right occurs
as a part of a security
interest in a mortgage.
The crop’s
stage of maturity does not
affect its capital gain
status. A crop at any stage, as
long as it is unharvested,
qualifies.
When
unharvested crops are sold with
the land and the seller seeks
capital gain treatment, the cost
of producing the crops must be
treated as a capital investment,
not as an operating expense.
Crop production costs should be
added to the basis of the
property and excluded from farm
operating expenses. Crop
production costs include all
cash expenses and fixed overhead
costs, such as depreciation (IRC
§ 268).
Remember that
if the farmer “elected out” of
IRC § 263A on an orchard or
vineyard, it is treated as IRC
1245 property. This means that
if there is any gain when it is
sold, you must recapture the
preproductive expenses that
would have been capitalized
except for the “election”. This
is when having local cost
studies of establishing orchards
and/or vineyards is useful to
either support the farmer’s
estimates or to use if records
are not available.
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