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Sale of residence/farm


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#1 Art

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Posted 07 July 2008 - 01:34 PM

How much acreage can a taxpayer include as part of his “residence” for sale of personal residence exclusion? Taxpayer has an active farm on 80 acres raising grain & hay. He & his wife originally built their house on a few acres that his wife inherited from her father over 25 years ago. Shortly thereafter he purchased the remaining contingent acreage from an unrelated party to start his farming operations. Like many farmers he has worked a regular job (construction) for many years in order to help support his growing family. The farm has generally contributed a significant portion of the total family income. After 25 years of farming he plans on selling both the house and the farm through an auction. He is considering whether he should “package” the house and a portion of the surrounding acreage in a separate parcel from the rest of the farm acreage or sell everything as a single parcel. Any acreage that he could include as part of the residence would of course save on the capital gains tax he would incur on the farm land sale. Local restrictions on farm land parcels require a minimum of 20 acres per residence to discourage subdividing and housing development of farm land. Would such a restriction be a controlling factor in the taxpayer’s favor to allow at least a minimum of 20 acres to be included as part of his residence? Could he make a case for a large portion of the acreage as part of his residence? Any other suggestions?

#2 jainen

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Posted 07 July 2008 - 01:55 PM

>>Could he make a case for a large portion of the acreage as part of his residence?<<

Twenty acres would certainly be acceptable under Section 121 if that is the local standard. Court cases have been won with two or three times that much.

However, Section 121 is referring ONLY to land that has been used as the principal residence. Clearly your client used his adjacent land as business property.

#3 kcjenkins

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Posted 07 July 2008 - 02:33 PM

Best to ask him about how many acres were actively farmed, and use that info as your guide. Clearly, whether he sells it all together or not, he can not exclude gain on that portion that was actively used for farming, but he certainly can exclude all portions that were not so used.

#4 Lion EA

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Posted 07 July 2008 - 04:20 PM

He needed to use it as his primary residence two out of the five years before the sale to exclude the profit from tax.

#5 jainen

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Posted 08 July 2008 - 11:29 AM

>>he certainly can exclude all portions that were not so used<<

I wouldn't be too aggressive with that position. The 80 acres were acquired as a unit in a separate transaction. There may be parts that are not directly used for farm activities such as planting, livestock, maintenance, or storage. But open space used as a buffer, watershed, or even viewscapes are part of the farm too.

Unless there was some positive action to convert the acknowledged farmland to a home, I wouldn't include it under Section 121. The kind of positive actions I am speaking of include physical things like fencing, landscaping, and non-farm outbuildings, but also intangible evidence of intent like filing for lot splits with appropriate reassessment, financing as residential property, and basis adjustment for depreciation.

#6 BulldogTom

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Posted 08 July 2008 - 11:51 AM

Perhaps the best way to structure the sale is to have one sale of both parcels, and to then allocate the sales price between the farm and the home. While the IRS can challenge this if it appears unreasonable or contrived, an arms length transaction is fairly good evidence of the fair market value of the property sold.

So, if the contract says the purchase price is (just and example) 1 million, and the allocation per the sales agreement is 300K for the farm and 700K for the home, and what constitutes the home is spelled out in the sales contract (only the portion that was used as the main home of the taxpayer), you should be in a defendable position.

I would not be too agressive with the allocation, but arms length, written transactions are a good piece of evidence.

Just a thought.

Tom
Lodi, CA

#7 JohnH

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Posted 08 July 2008 - 11:54 AM

Another potential trap can be desginating the majority of the property as farm land in order to reduce property tax assessments on an annual basis over many years, and then trying to reverse that thinking when the property is sold. Of course, in many cases the capital gains tax would be much less than the sum total of property taxes saved over the years, but the taxpayer doesn't want to hear that sort of thing at selling time - they just want you to "do something about the #$%^# tax bill."

#8 jainen

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Posted 08 July 2008 - 12:38 PM

>>but arms length, written transactions are a good piece of evidence<<

I agree. If you can get the buyer to accept the business property with minimal basis, you might have something. Of course, the lender's appraiser and the county assessor might have an opinion too.

#9 Art

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Posted 08 July 2008 - 01:15 PM

Thanks for all the great posts. Good food for thought. I will be meeting with the client soon and getting further details.



>>but arms length, written transactions are a good piece of evidence<<

I agree. If you can get the buyer to accept the business property with minimal basis, you might have something. Of course, the lender's appraiser and the county assessor might have an opinion too.






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