PARKER, COLO. (RFD-TV NEWS) — New IRS guidance is clarifying how farmers may defer taxes on the sale of qualifying farmland, including requirements for both the seller and buyer.
Farm CPA Paul Neiffer said the proposed regulations provide favorable clarification on several aspects of the provision, although installment sales do not receive the full tax-deferral treatment some had hoped for.
Requirements for Qualifying Farmland
Neiffer said the farmland must have been farmed by a qualifying farmer under FSA rules for at least 10 years before the date of sale.
The buyer must also be an individual who qualifies as a farmer and agrees to farm the property for at least 10 years.
The IRS guidance also addresses situations in which farmland is not planted every year.
Neiffer said the land can still qualify when normal farming practices include fallow periods.
“Out in the West on wheat ground, you might have a wheat crop one year, then the next year’s fallow, and then the following year it’s planted back to wheat,” Neiffer said. “That was okay.”
The guidance also clarifies that an estate or trust can qualify as a pass-through entity under the provision.
Installment Sales Get Less Deferral
Neiffer said the biggest disappointment involved farmland sold through an installment sale.
Some had expected sellers to receive the same three- or four-year tax deferral on installment-sale transactions.
Instead, the proposed regulations provide that sellers can defer the tax only on the first year of the sale.
“As you start collecting those payments over the next 10, 15, 20 years, you have to pay that tax immediately,” Neiffer said.
He said that was not as favorable as expected, although installment sales still receive some tax benefits because taxes generally are paid as payments are collected.
Potential Tax Savings
Neiffer said the value of the provision depends on what the seller can earn by investing the money that would otherwise go toward taxes.
If the investment return is about 5%, he estimates the provision could provide savings of roughly 7.5%.
“If you can invest higher than that, then it might save eight or nine percent,” Neiffer said.
If the investment return is lower, he said the savings would be closer to 5%.
“It’s helpful, but it’s not as good as it could have been,” Neiffer said.
