Do we have to pay capital gains on the sale of our farm?
My husband and I have a farm/ranch. We reside on the farm. We have cattle, pasture and hay ground. I would like to sell the place and buy a smaller place in a nicer climate. The difference between the basis and the sale price of the farm could be as much as $2M and the property we are looking at purchasing will be somewhat less than the sale price of the farm giving us maybe 200K in our pocket. In order to minimize capital gains does the new property have to be the same acreage, does it even have to be a farm to qualify as a like investment or can it be just a residence? Although we hope to get a place with about 100 acres there so we can take some cattle. How much of the 200K would be taxable?
Dear Bunnie: You should get some advice, but the things that will come into play are (1) was this your primary residence for at least 2 of the last 5 years? (2) were you depreciating any buildings equipment etc.?
If you qualify for an exclusion (2 of the last 5years) you and your wife can exclude $500,000 of your gain. You will pay tax on the additional gain. Whether you buy a farm of equal size or smaller or larger has no bearing. Old tax laws were changed about 15 years ago.
You may have to report the sale of buildings equipment etc on form 4797 and possibly pay tax on any gain after recapturing the depreciation already claimed.
You may want to seek an expert in the field of 1031 exchange to see if you can work an exchange under section 1031. This will depend on your zoning laws and how the farm is set up. A 1031 exchange can not be used on a personal residence. However if the farm is zoned separately it may work. This would allow for the deferment of taxes on any gain on the business.
This advice was based on the tax law in effect at the time it was written as it applies to the facts that you provide. Click on my profile to read more. Errol Quinn Enrolled Agent
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