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What is Your Total Capital Gains Tax Rate?

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September 16th, 2011

We have gotten a couple of questions lately about what is the capital gains tax rate on the sale of farm land.  To answer that question requires:

  • How long have you owned the land,
  • Is there equipment and fixtures attached to the land such as grain bins, fencing, etc. that you have taken depreciation on,
  • Is there buildings that you have taken straight-line depreciation on,
  • What state do you live in.

Based upon these facts, we can then give you an idea as to what your capital gains tax rate is.

In brief, if you have owned the farm land less than a year, then it is subject to short-term capital gains tax rates which is essentially ordinary income rates.  If you had allocated cost to equipment, farm buildings (20 year life), land improvements, etc., then the depreciation recapture on these items is also ordinary income.  If you had owned a farm house which you rented out and depreciated over 27.5 years, then this is subject to a maximum federal rate of 25%.  The farm land if held for one year or more is subject to maximum federal long-term capital gains rate of 15%.  Then, on top of it, you need to calculate your state capital gains or income tax rate.  Most states tax capital gains as ordinary income, but several states give you a break for the sale of farm land and in many cases, you may pay no state capital gains on the sale of your farmland.

For example, lets assume you bought farm land in Nebraska for $300,000 five years ago.  You allocated $25,000 to fencing and this is fully depreciated.  The rest was allocated to farm land and you are selling it in 2011 for $1 million.  The $25,000 of depreciation recapture is taxed at your ordinary rate.  The remaining $725,000 gain is taxed at a federal rate of 15%, plus the applicable state of Nebraska rate (whatever it might be less any Nebraska capital gains deductions ).

As you can see, the capital gains tax rate can get fairly complicated and you need to discuss this with your tax advisor to pin down what the actual tax might be.

Paul Neiffer

Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a partner with CliftonLarsonAllen in Yakima, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. In fact, Paul drives combine each summer for his cousins and that is what he considers a vacation.

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10 Comments

  • August 23, 2012 at 7:40 am

    Mary Roberts

    I would like to sell my farm and am worried about the capital gains tax. I understand that you are given one capital gains in a life time that is waived. Is this correct?

    Thank you,
    Mary

  • November 18, 2012 at 7:05 am

    Neil

    I’m selling my farmland, 48 acres I inherited and the bases was 4000 per acre. I’m receiving 8500 per acre
    I know I will be paying 15% capital gains on the profit. Will I pay income taxes on the remaining? Thank You, Neil

  • November 18, 2012 at 6:25 pm

    Paul Neiffer

    No, you only pay capital gains taxes on the gain of $4,500 per acre. The $4,000 cost basis is a tax free return of capital.

  • February 7, 2013 at 3:07 pm

    Jerry Nelson

    My wife recieved 157.3 acres when her mother passed away 3 years ago in a trust, which came from her grandfather that was trusted to her mom, we were told that we will have to pay gain tax on what the value of land was back when her grandfather passed away in march of 1979, what I found was that land was valued at $559 an acre then and she sold it in 2012 for $9000.00 an acre. is this true and what will we be paying in gain tax’s

  • March 15, 2013 at 7:41 am

    Ron Hawkinson

    I am selling some land that I have already paid a base of 2000.00 dollars an acere. Do I just pay capital gains on the amount above that figure? Also do I have to pay any other taxes on the balance? Thank you for your time

  • March 15, 2013 at 1:49 pm

    Paul Neiffer

    Yes, you only pay on the excess at both federal and state tax rates. Federal maximum of 15% and regular state rate. No other taxes unless there is an excise tax on the sale.

  • March 23, 2013 at 5:21 am

    Dave Wilson

    We purchased 60 acres, built a house on it and then started farming it. We recently sold it all. Would the 60 acres be considered part of the home sale or the farm sale? Do we pay a capital gains on the land or can it be considered part of the house sale? Understand we have to pay capital gains on the equipment less the basis.

  • March 27, 2013 at 6:31 am

    Paul Neiffer

    The answer is it depends. There have been court cases that allow 20+ acres of farmland to be included with the sale of house and treat it all as part of the home sale. Did you live in the home for at least 2 years.

  • April 14, 2013 at 8:28 am

    Elaine Murphy

    We sold a farm in another state than where we currently live and work. We are paying 15% capital gains on the amount above the previous basis which we understand. Then we got hit with the state income tax where the farm was located as well as paying state income tax in the state where we live. There was a state income tax credit from the state where the farm was located applied to the state where we live, but we are still paying 35% state income tax rate on some of it even in both states. This seems like double state income tax to me. Comments?

  • June 4, 2013 at 8:24 am

    Steve Hodge

    We are selling a farm we inherited. It was bought probably in the 40′s to 50′s by my grandfather. My portion is 15.55 acres at $2800.00 an acre. I will receive $43,547.43. How do I figure the capital gain taxes that I would have to pay. I am thinking of taking this and purchasing similar property to build on in the future. I know there is a 1031 form. What all does this incompass and can I do it?

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