The lifetime capital gains deduction, also known as the capital gains exemption, allows an individual to have up to $1 million in capital gains on qualified farm property tax free.
The key is that the property needs to be qualified farm property.
This obviously provides a huge tax benefit, but many events can cause clients to question their qualification, such as renting out their land or passing it on to a non-farming child.
Qualified farm property is defined as real or eligible farm property owned by you or your family. The property can qualify if used in the farming business by you, your spouse, your parents, your children, a family farming corporation or a family farm partnership.
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Farming property generally qualifies if these conditions are met:
- You have owned the property for at least two years before selling it.
- You have used the property in the business of farming on a regular and continuous basis. This is met if you or one of your family members has farmed it for half of the years it has been owned.
- You have earned more gross in-come from farming than from any other source for any two years it was owned.
Special rules apply if the property was acquired before June 18, 1987. If the property has not changed ownership since that date, then any of the following criteria could qualify the property:
- The property was used principally in the business of farming in the year of disposal.
- The property was used principally in the farming business in at least five years of ownership.
- Meets the post June 17, 1987, rules.
However, planning opportunities exist if it does not look like you will meet all of this criteria and you want your property to qualify.
It’s always possible that tax law will change in the future. Any owner of farmland may consider using the capital gains exemption deduction today to increase the cost base of the land to lock in this tax benefit and lower future capital gains.
Several techniques can be used, including selling to a spouse, child, corporation, partnership or trust.
Owners of farm property who are considering selling it should obtain professional advice.
Planning can be done to ensure the farm property qualifies for the deduction.
