By Andy Biebl
DTN Tax Columnist
DTN Tax Columnist Andy Biebl is a CPA and principal with the accounting firm of CliftonLarsonAllen LLP in New Ulm and Minneapolis, Minn., and a national authority on agricultural taxation. He'll address detailed tax strategies for farm retirement at an Ag Summit workshop in Chicago Dec. 7 www.DTNAgSummit.com. To pose questions for upcoming columns, email AskAndy@dtn.com.
Andy, I hate to admit this but my 80-year-old father is a Neanderthal. We have no on-farm successors, so he has an agreement to sell the family farm to a young Amish couple for cash. He is thinking about stuffing all the money in shoe boxes to avoid paying capital gains taxes. Some people have recommended that he just raise the value of his home, so he'd at least qualify for the $500,000 per couple ($250,000 per single person) exemption on a primary residence's capital gains. What should I advise him?
Your dad needs to start watching that new TV series, "Orange is the New Black." If the IRS uncovers this arrangement, it is not the kind of transaction where they will say, "Just pay the taxes you owe us plus a 20% penalty." It's the kind of deal that will get him a hefty civil tax fraud penalty at best, and a stay at the Greybar Hotel for criminal tax fraud at worst. In this day and age of electronic transactions, 1099s and linked data bases, it's insanity to think that a large land transaction could escape tax reporting.
First of all, the young couple will insist on a legal transfer of title. There is a deed to record that is on public record. When the closing does occur, the title company or attorney will file a 1099 tax form to the IRS, which is required on real estate sales transactions. The IRS has sophisticated computer systems cross-checking electronically these days, to make sure people report all income.
Second, if he's selling his primary residence, he can't just attribute the first $500,000 of gain to that instead of the farmland. He can only use the principal residence exclusion up to the value of the residence and related personal use property (such as a garage and adjacent woodland). The value of a person's house is recorded with the county assessor for property tax purposes. Any sale price would have to be within reason of that record. The remainder of the gain, attributable to the farmland, is taxable.
The short story is this: Tell your dad it won't be any fun for you to spend Sundays visiting him at Club Fed. I can understand it is painful for your father to give the federal and state government about 30% of his lifetime gains on farmland. But the capital gain tax is the cheapest rate we have: 20% federal, 3.8% for the new Obamacare net investment income tax, and then probably about another 6% or so to the state (although that last number can be anywhere from 0% to 10%, depending on which state). And if he is really adverse to paying tax, the legal alternative is to trade the land into other real estate. That's probably not a practical alternative at age 80, as there is nothing easier to own than farmland.
Can "prevent plant" insurance payments be applied to the following tax year if that is when you would normally have marketed the grain from those acres?
The USDA website describes Prevented Planting insurance as providing coverage when extreme weather conditions prevent expected plantings. That definition aligns nicely with the tax provision allowing an elective one-year deferral of crop insurance proceeds in Section 451(d). The tax code says that insurance can be deferred if it arises from destruction or damage to crops from weather-related conditions such as drought, flooding or other natural disaster, or the inability to plant crops because of such a natural disaster.
So, you are on solid ground making the deferral election, assuming that you normally would have marketed that majority of that crop in the subsequent year.
Andy, I find your tax advice very helpful. Where can I find past articles that appear on DTN?
DTN archives all my past columns. For paid subscribers, my most recent columns are always posted in TOWN HALL and FARM BUSINESS. Paid online subscribers will find all older columns by going to the NEWS section, clicking on NEWS SEARCH and putting ANDY BIEBL in the key word search.
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