How much are capital gain taxes when selling a farm or ranch?
How much tax will I owe if I sell my farm or ranch?
How do I save taxes on the sale of a farm or ranch?
How can I use a 1031 exchange to save taxes when selling a farm or ranch?
How can I use a Charitable Remainder Trust to save taxes when selling a farm or ranch?
If you are considering selling a farm or ranch, there are important tax and financial planning issues of which you need to be aware. Engaging in planning prior to a sale is critical for identifying these issues and for implementing strategies to effectively address them.
Your farm/ranch likely represents the majority of your net worth. Who you choose to list your property with is a critically important decision. Choosing the right ranch broker will not only help you obtain a top price for your property but will facilitate a smooth transaction. For a list of questions you can use as a guide for interviewing a farm/ranch broker, request Wealth Guide titled: Interview Guide for Selecting a Farm/Ranch Broker.
Various tax rates and tax treatment apply to the different types of assets involved with the sale of a farm or ranch. How you allocate the sales price to the assets of your ranch will determine the tax you may ultimately pay. It is imperative that you and seek direction from your tax advisors when purchase price allocation is being negotiated.
Below is a summary of the four ways investors may be taxed on the sale of a farm or ranch:
- Federal Ordinary Income Tax: Taxpayers will be taxed at rates up to 39.6% depending on taxable income.
- Depreciation Recapture: Taxpayers will be taxed at a rate of 25% on all depreciation recapture.
- Federal Capital Gain Taxes: Investors owe Federal capital gain taxes of either 15% or 20% on the their economic gain depending upon their taxable income.
- New Medicare Surtax: The Health Care and Education Reconciliation Act of 2010 added a new 3.8% Medicare Surtax on “net investment income.” This 3.8% Medicare surtax applies to taxpayers with “net investment income” who exceed threshold income amounts of $200,000 for single filers and $250,000 for married couples filing jointly.
- State Taxes: Taxpayers must also take into account the applicable state tax. Montana currently has a top rate of 6.9%.
Tax Saving Tools for Selling Appreciated (or Depreciated) Property
Selling highly appreciated (or depreciated) property can result in a large tax bill. Taxes due on the sale may range from 20% to over 50% of the sale price depending on the cost basis of your property and how your property is owned.
Two financial tools are commonly used to defer or avoid tax on the sale of highly appreciated (or depreciated) property: IRC Section 1031 Exchange and IRC Section 664 Charitable Remainder Trust (CRT). Using one or a combination of these tools with a sale will save tax. Money that would have gone to paying tax can then be invested to help generate income for you and your family.
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