Don’t Let the Tax Tail Wag the Dog

Don’t Let the Tax Tail Wag the Dog

Troy Stafford

Minnesota Land Specialist – CPA

Many landowners worry about the tax implications of selling row crop land, often due to lack of understanding. As a general rule, if you sell your land for more than you paid (basis) for it, you have a capital gain that may be subject to taxation. Special rules apply to gifted or inherited land, which we will cover later. Here are tips on how to not let the tax tail wag the dog.

Understanding Tax Implications

In order to better understand the sale implications, it is imperative to have an understanding of some relative definitions. The IRS classifies land as a capital asset, with tax treatment based on the length of the holding period. Long-term (LT) capital gains apply to assets held over a year. Short-term (ST) capital gains cover assets held for a year or less.

Your land’s basis includes the purchase price and any improvements made during ownership. Gifted or inherited land follows different tax rules. If properly done, recipients may receive a “stepped-up basis” thereby adjusting their basis to the Fair Market Value (FMV) at the time of the donor’s death. This is a very generous tax treatment afforded by the IRS (tax code) and should be considered when accounting for estate planning purposes as well.

The reason the holding period classification is critical is the taxation of each of these 2 categories is significantly different at the Federal (IRS) level. Short-term capital gains are generally taxed at your ordinary income level (marginal tax rates) whereas Long-term gains may be afforded special tax considerations. For the 2025 tax filing year, these LT rates are 0%, 15%, and 20%, depending on the taxable income of the individual. For ST gains, the 2025 bracket is 0 – 37%, once again depending on the taxable income of the individual. Needless to say, this LT capital gain classification may result in substantial tax savings.

Strategies to Reduce Capital Gains Tax Exposure

In addition to holding the land for a year or more, there are a number of other sales strategies that may mitigate your tax liability as follows:

  • Deferred (1031) Tax Exchange – If you properly identify and purchase another investment property within a specified period, you may be able to defer the gain on your sale. Strict criteria apply, so consult an experienced land expert and tax advisor.
  • Deferred Sale – This involves pushing the sales date to the future thereby strategically placing the income into a different, generally more favorable, tax year.
  • Installment Sale – This concept is similar in nature to the deferred sale as it pushes the sale into the future, however it may be over multiple tax years. This is often accomplished with a “Contract for Deed” structure whereby the taxes are paid on a “pro rata” share of the gain in the year the payments are collected.

To maximize tax strategies, meet with professionals and your tax advisor before selling.

Contemplating the Sale

Critical in the evaluation on whether or not to sell, a number of additional questions may require analysis first. For example you might want to consider the rational for selling in relationship to the intended use of the proceeds. Additionally, there are times when the tax implications of selling may be less drastic than a market correction thereby leaving you with less in the end. Each of these considerations requires further exploration before an “educated” decision is made in your specific situation. Making an informed decision as to what is best for you and your family and combining that with tax mitigation strategies will help to add value to the difficult decision you are faced with, but please take the time to understand the process and how it may ultimately affect your situation by utilizing professionals before and during the sales process!

There are a number of other tax considerations outside of the above mentioned. These include state tax implications for capital gains, Alternative Minimum Tax situations and Net Investment Income Tax exposure. Given the complexities, consulting a knowledgeable expert alongside your tax advisor is essential. That’s why it’s imperative to meet with someone knowledgeable on the subject in addition to your personal tax advisor as individual situations may vary on a case by case basis.

Disclaimer: This information serves as a guideline, not tax or legal advice. Every transaction is unique, so consult us and your tax professional for case-specific guidance.

 

Do you want to learn more?

Don’t let the tax tail wag the dog – reach out to a High Point Land Company Agent today. For more questions regarding land real estate, visit our YouTube Knowledge Center. 

 

Living in the Dodge County area all his life and working on two local dairy farms throughout high school and college gave Troy immense respect for farmers. After seven years in public accounting, Troy has worked in various private industries in both Controller and CFO capacities, including 10+ years working for two different farm supply, producer owned, cooperatives. Mr. Stafford also holds an active CPA license and has an MBA degree. Contact Troy at 507-259-3047 or email Troy@highpointlandcompany.com.

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