Tax Considerations of
Farm Transfers
Philip E. Harris
Center for Dairy Profitability
Department of Agricultural and Applied Economics
University of Wisconsin-Madison/Extension
Alternatives for transferring
farm assets
p. 1
1.
2.
3.
4.
5.
Sale
Gift
Transfer at death
Trade
Transferring to a business
entity
Taxes imposed on farmers
p. 1
1.
2.
3.
4.
5.
6.
7.
Property taxes
Sales taxes
Employment taxes
Self-employment tax
Income taxes
Gift taxes
Death taxes
Sale
p. 1
• No gift or death tax
consequences
• But there are income tax and
self-employment tax
consequences
Example 1: Land
Sale Price
Basis
Gain
p. 1
$295,000
11,800
$283,200
Example 2: Cows
Sale price of cows
Income tax basis
Gain
pp. 1-2
$130,000
0
$130,000
Example 3: Machinery
Sale price
Basis
Gain
$58,934
- 8,434
$ 50,500
p. 2
Character of gain or loss
p. 2
• Ordinary income (10% - 39.6%)
• Capital gain (0% - 28%)
• Self-employment income (15.3%)
(13.3% for 2011 and 2012)
Example 4
Gwen’s wages
Dale’s SE income
Wage base
SS tax rate
SS tax
p. 2
$100,000
$175,000
$113,700
12.4%
$ 14,099
Example 4
SE income
Medicare rate
SE income
Threshold
Excess
Addtnl rate
Total Medicare tax
p. 3
$175,000
× 2.9%
$175,000
– 150,000
$ 25,000
x 0.9%
$ 5,075
225
$5,300
Three categories
p. 3
1. Subject to ordinary tax rates
and to self-employment tax
Example 5
p. 3
• Gain from calves is subject to
income tax and SE tax
• Gain from sale of heifers and
cows is not in this category
Three categories
p. 3
1. Subject to ordinary tax rates
and to self-employment tax
2. Subject to ordinary income
tax rates but not SE tax
a. Depreciation recapture
b. Young breeding stock
Example 6
p. 3
All of the gain on the sale
of the machinery
is treated as ordinary income
because it was all a result
of depreciation
Example 7
p. 4
Heifers that are younger than 24
months fall into this category
Three categories
pp. 3-4
1. Subject to ordinary tax rates
and to self-employment tax
2. Subject to ordinary income
tax rates but not SE tax
3. Capital gain or ordinary loss
Example 8
Gain on house
Loss on shed
Loss on barn
Gain on land
Net gain
p. 4
$ 120,000
- 2,000
- 5,000
48,000
$ 161,000
Example 8
Gain on house
Loss on shed
Loss on barn
Gain on land
Net loss
p. 4
$
0
- 2,000
- 5,000
5,000
$ - 2,000
Net investment income tax
pp. 4-5
Beginning in 2013 there is a 3.8% tax
on net investment income
but only if AGI > $200,000
($250,000 MFJ; $125,000 MFS)
Example 9
pp. 4-5
AGI without sale
$50,000
Net investment income
$5,000
Gain from sale
$161,000
AGI with sale
$211,000
Threshold
200,000
Excess
$ 11,000
Net inv. inc. tax ($5,000 x 3.8%)
$190
Installment sale
p. 5
Gain is reported as payments are
received
Example 10: $28,320 of gain
in each of 10 years
Transfer by Gift
• Gift tax consequences
• Income tax consequences
p. 5
Federal Gift Tax
pp. 5-6
• Annual exclusion: $14,000/year
• Marital deduction: unlimited
• Lifetime exclusion:
2002 - 2010: $1,000,000
2011: $5,000,000
After 2011: $5,000,000 (indexed)
Example 14
Value of gifts
Annual exclusion
Taxable gift
Gift tax
Applicable credit
Gift tax due
p. 6
$ 575,000
- 26,000
$ 549,000
$ 173,930
- 1,730,800
$
0
Federal and Wisconsin
Income Tax
pp. 6-7
Generally, donor’s income tax
basis is carried over to donee.
• Exceptions:
– FMV < Donor’s basis
– Gift taxes due
Example 15
Value of land
Carryover basis
p. 7
$295,000
$ 11,800
Transfer at Death
• Estate tax consequences
• Income tax consequences
p. 7
Federal estate tax
Years
2006-2008
2009
2010-2011
After 2011
p. 7
Exclusion
$2,000,000
$3,500,000
$5,000,000
$5,000,000 (indexed)
Example 16
Value of estate
Lifetime gifts
Total
Tax on $ 5,014,550
Applicable credit
Federal estate tax
p. 7
$4,439,500
549,000
$5,014,550
$1,735,893
- 1,730,800
$
5,893
Marital Deduction
p. 7
Any amount passing to
surviving spouse is deducted
from the taxable estate.
Wisconsin Estate Tax
p. 8
Wisconsin estate tax expired
at the end of 2007.
Federal and Wisconsin
Income Tax
p. 8
• Assets passing at death receive
an income tax basis equal to
the date-of-death value.
• Both halves of marital property
get a date-of-death value basis.
Federal and Wisconsin
Income Tax
p. 8
For deaths in 2010, if the executor
elected out of the estate tax,
assets get a carry-over basis.
– But, by election,
• $1,300,000 is added
• $3,000,000 is added
Example 18
Asset Dale’s
Feed
0
Cattle
7,000
Mach.
8,434
House 37,500
Land 60,000
Total 112,934
p. 8
Gwen’s
After
0
23,550
7,000
188,400
8,434
117,868
37,500
175,000
60,000
750,000
112,934 1,254,818
Trade
p. 9
If farm assets are traded for
“like-kind” assets,
gain or loss is rolled over
into the acquired property.
Example 20
Trade-in value
Basis in tractor
Realized gain
Boot
Basis in planter
p. 9
$25,000
- 2,000
$23,000
$15,000
$17,000
Transferring to a
Business Entity
p. 10
Assets can be exchanged for
ownership in an entity without
triggering recognition of gain
Example 24
p. 10
• Grandpa owns 42% of LLC
• Dale owns 58% of LLC
Example 26
p. 11
Sale price of 20% $ 73,100
Grandpa’s basis
0
Grandpa’s gain
$ 73,100
Example 27
p. 11
Value of 20% interest $ 73,100
Annual exclusion
- 28,000
Taxable gift
$ 45,100
Questions?