Tony Nitti does a regular column on Forbes.com and he just released a very good recap of the 3.8% net investment income tax that was implemented by Obamacare, but was not applicable until 2013. Many farmers assume this tax will never apply to them since their adjusted gross income will never be in excess of $200/250,000 since they maximize their available deductions and timing of income.
In most cases, they are correct. However, what about farmers who retire and then start cash renting their farmland. If you have 1,000 acres of good farmland, it only takes $250 per acre cash rent to put you over the threshold. Then, after a few years of cash renting, the farmer elects to sell his farmland. In this case, almost all of the gain will be both subject to the 3.8% net investment income tax and the 20% maximum federal tax plus state income taxes.
Let’s look at an example:
As you can see, by waiting one year, his total taxes from selling the farmland has risen almost $1.3 million.
I do not see this tax getting repealed. As a matter of fact, there are several influential individuals such as Bill Gross, Warren Buffett, etc. calling for the elimination of preferential capital gains treatment. If that happened, this farmer’s tax would increase by another 20% or almost $3 million.
We will keep you posted on any details, but it is important to know how the net investment income tax might affect you and I recommend reading Tony Nitti’s post. It is done in a question and answer format and should answer most of your questions.
Paul Neiffer, CPA