Tax consequences on the sale of a farm or ranch

Selling a farm or ranch often involves significant tax consequences. Capital gain taxes on the sale of appreciated land is usually the largest amount of tax. 

If landowners sell land they have had for at least one year, any gain from the sale is taxed at either a zero percent, 15 percent or 20 percent rate. The capital gain tax rate depends on taxable income. The higher the income, the higher the rate. 

Net investment
income tax

In addition to capital gain taxes, there is a 3.8 percent surtax on net investment income landowners may have to pay. Net investment income includes, among other things, taxable interest, dividends, gains, passive rents, annuities and royalties.

Landowners must pay the surtax if they are a single taxpayer with modified adjusted gross income (AGI) over $200,000, a married couple filing a joint return with modified AGI over $250,000 or a married person filing a separate return with modified AGI over $125,000.

In addition to capital gain taxes on the sale of land, taxes are also due on the sale of buildings, livestock and equipment. Some of these assets are taxed at capital gain tax rates, while others are taxed as depreciation recapture and ordinary income.  

Depreciation recapture is the gain realized by the sale of depreciable capital property which must be reported as ordinary income for tax purposes. Depreciation recapture is assessed when the sale price of an asset exceeds the tax basis or adjusted cost basis. The difference between these figures is thus “recaptured” by reporting it as ordinary income.

Depreciation recapture on non-real estate property, such as equipment, is taxed at the taxpayer’s ordinary income tax rate, rather than the more favorable capital gains tax rate. Depreciation recaptures on gains specific to real estate property are capped at a maximum of 25 percent for 2022.

Fortunately, tax-saving strategies can reduce or completely eliminate the taxes on a sale, allowing landowners to preserve the equity they have worked so hard to create.

One of the first things I usually recommend to people selling a farm or ranch is they get a tax projection from their certified public accountant. This way, they can determine if the tax consequences are large enough to warrant using the various tax-saving strategies available.

In future articles, I will discuss the different tax-savings strategies landowners can use on the sale of a farm or ranch.

Chris Nolt is an independent, fee-only registered investment advisor and the owner of Solid Rock Wealth Management, Inc. and Solid Rock Realty Advisors, LLC, sister companies dedicated to working with families around the country who are selling a farm or ranch and transitioning into retirement.  To order a copy of Chris’s new book “Financial Strategies for Selling a Farm or Ranch,” visit Amazon.com or call Chris at 800-517-1031. For more information, visit solidrockproperty.com or solidrockwealth.com.