Sale of a farm's personal residence and adjacent land

[Dan]

Question:  If you sale a farm home, a machinery shed, a grain bin, a small barn and 40 acres of adjacent land, can you exclude all if under $500,000 gain for a married couple who have lived in the home many years?

 

The 40 acres of land is native grass. 

 

Thanks for your early reply.

[Lion EA]

If you sell the house and the grounds that the family used for their personal enjoyment and family use, then yes they can exclude $500,000 in capital gain.  But, is the machinery shed, grain bin, and small barn part of the farming operation?  Was depreciated?  Was the grass used for grazing  or landscaped as part of the home for the children to play, etc.?  What is on the land they didn't sell that made it the farm as opposed to the home?  You have some questions to ask your clients.

[Dan]

Lion, thanks for responding.  Yes, the machinery shed, grain bin, and small barn were part of the farming operation.  The husband has past away now but for a number of years before his death, he raised donkeys and they grazed on the buffalo grass (native grass).  The donkeys were his therapy and I don't know if he ever sold them but rather gave them away.  Before he put most of his ground in CRP (a government program) he would plant wheat and store some of the wheat in the grain bin and he would use his machinery shed to store his tractors and trucks and use it as his shop to work on farm equipment.  I believe he had milk cows and a few cows.  He had also around 5 to 7 horses that grazed on the native grass.  The horses were also family pets.

 

According to the son, his grain bin cost was around $2500.

 

The son said the house, land, machinery shed was purchased for around $7,500 or that is what he paid his father in law because most of the quarter of land was given to him.

[kcjenkins]

How long ago was it that he stopped farming as a business?  Horses and donkeys as pets is not 'farming'.  And if the father was the only 'farmer', and he's dead, then his heirs inherited the property and the issue is whether the heir or heirs have used the property as a residence, and for how long.  May, depending on the details, be fully excludable. 

[Dan]

Thanks KC

 

I guess I forget to tell you that the farmer's wife is still living.  

The father planted wheat in 2013 for 2014 year.  The wheat did not make so he instead collected crop insurance on it.  His other land is in CRP and he has been collecting payments on it for a number of years.  

 

So in answer to your question, the father was still farming 160 acres until his death.

 

The wife is still living.  She has sold the farm property mentioned earlier and is living in town. 

[Lion EA]

I'll leave this up to you who have farmers as clients.  Sounds like some of the property was gifted at one point, taking donor's basis.  And, depending on ownership, current widow had half stepped up when husband died.  Then you get into business vs. hobby.  If in the CRP, I would think business.  You may have two sales:  house and some small acreage plus the farm.

 

(All I know is my tiny farm in IL with rent and sharecroppers and feed corn and soy beans and whatever government program my cousins tell me they're using on their adjacent land !!)

[kcjenkins]

So there were 200 acres in all?  160 crop land and 40 for home and pasture for pets?  Did she sell it all?  Did she sell to related party?

[Dan]

Thanks Lion and KC

 

There were around 160 acres on this quarter of ground in question.  The amount of acres that has not sold is around 120 acres which is in CRP.

 

What sold in the quarter mentioned above was 40 acres which included the house, machinery shed, wheat bin, small barn and native grass land.  Each of these items were sold as one unit.

 

The items above were not sold to a related party.

 

The son said his dad paid around $2500 for the wheat bin.  He thought his parents had paid around $7500 for the whole property since the quarter of land was given to his mom.  

[DANRVAN]

The answer depends on how the land was treated for tax purposes in the past.  Most likely all the farm buildings were depreciated.  How much of the land was allocated to the farm in determining the amount of property taxes, insurance, and mortgage interest (if any) that was deducted on schedule F?

 

In the area I am from, the property tax statement breaks out the house and small amount of land surrounding the house as a farmstead.  The county has a record of when and how the property was transferred and the amount of any consideration given

[Dan]

Thanks Danrvan

 

I checked with the appraisers office and they told me they only go back 5 years concerning records kept concerning when the property was transferred.

 

The appraisers office did break down how taxes are figured for the Ag land; the land the house sits on; the value of the Ag buildings and the value of the house.

 

Ag land comprised 149.5 acres-taxes were figured on this

Home comprised 1/2 acre-taxes were figured on this

 

They figured taxes on the Ag buildings

They figured taxes on the house

[DANRVAN]

 

 

I checked with the appraisers office and they told me they only go back 5 years concerning records kept concerning when the property was transferred.

 

 

The county clerk should have a record of the deed.