TRANSFER OF FARM ASSETS

Issue 1: Buying and Selling Farmland pp. 87- 89

Cost Basis Purchase [IRC § 1012]

Paid in: cash, debt or otherGift [IRC § 1015]

Generally donor’s basis

Issue 1: Buying and Selling Farmland p. 87

Cost Basis Inheritance [IRC § 1014]

FMV on DOD, or 6 months laterMay use IRC § 2032A, special use valuation on qualifying property to reduce, no more than $1,120,000 in 2017.

Issue 1: Buying and Selling Farmland p. 88

Purchase Costs included in basis Real Estate Taxes paid by

purchaser owed by seller. If seller reimburses, then RE

taxes are deductible

Issue 1: Buying and Selling Farmland p. 88

Settlement Costs can be included in basis: Abstract fees Legal fees Recording fees Surveys Title Insurance

Issue 1: Buying and Selling Farmland p. 88

Loan Costs are not included in basis, taxpayer can amortize: Points Mortgage Insurance Loan Assumption fees Credit Report costs Fees for appraisal required by lender Fees to refinance a mortgage

Issue 1: Buying and Selling Farmland p. 89

Practitioner Notes Growing Crops

Gain on unharvested crops sold at the same time as land is § 1231 gain

Option PaymentsGain or loss is capital [Treas. Reg. §

1.1234-1]Unless asset is subject to § 1231

Issue 1: Buying and Selling Farmland p. 89

Sale of Land with CRP Contract If the buyer succeeds in interest to the

seller’s CRP, the new owner takes over. If the buyer does not succeed, then the

seller may be required to repay CRP payments received plus interest and any additional costs.

USDA Notice CRP-819 provides for early termination: buyer a next gen farmer

Issue 2: Disposition of Converted Wetlands pp. 90-92

Wetland mitigation banking uses a market-based approach to restore, create, or enhance wetlands in one place to compensate for unavoidable impacts at another location.

Issue 2: Disposition of Converted Wetlands p. 90

Typically, mitigation banking system is administered at the state level. USDA currently recognizes eight

wetland mitigation banks See list Operates at zero loss

IRC §1257 p. 90

Any gain on the disposition of converted wetlands or highly erodible cropland shall be treated as ordinary income. Any loss recognized (converted

wetlands/erodible cropland) shall be treated as a long-term capital loss

Converted Wetland p. 91

Any converted wetland as defined in § 1201(4) of the Food Security Act of 1985. Activities resulting in conversion Held by any other person what

used land for farming purposes

Example 1 p. 91

Dave owns a farm on the outskirts of Sioux Falls, SD Basis is $1,800 per acre Prime for development 2012 purchases one wetland credit to

drain a one acre wetland ($11,000) Cost to tile and drain the acre ($2,000)

Example 1 p. 91

2017: Dave sells 10 acres to a developer. The sale includes the one acre of converted wetland. Sale price is $15,000 per acre.

Example 1 p. 91

Dave reports the sale of nine acres on Form 4797, Part I. The sales price is $135,000 ($15,000 x 9 acres). His basis deduction is $16,200 ($1,800 x 9 acres).

Example 1 p. 91

The sale price for the converted wetland acre is $15,000. Because the gain is from the sale of a converted wetland, the gain is taxed as ordinary income. Dave reports the $200 gain ($15,000 − $14,800 basis) on Form 4797.

Example 1 p. 91

Example 2 p. 92

Same facts as Example 1 except the land was sold for $11,500/Acre. Dave reports the sale of the nine

acres on Form 4797, Part I.

Example 2 p. 92

One acre is converted wetland with a $14,800 basis. The sale of the wetland acre results

in a $3,300 ($11,500 − $14,800) long-term capital loss. Dave reports the loss on Form

8949, Sales and Other Dispositions of Capital Assets.

Example 2 p.92

Example 2 p. 92

Issue 3: Form 4797p. 93

Form 4797 calculates both gains and losses of business property dispositions; gains and losses may come from other forms to be netted on Form 4797

Introduction p. 93

Capital and Ordinary transactions are separated; SE tax generally isn’t applicable

unless recapture of §§ 179 or 280F deductions is required.

Figure 1 p. 93

Determine where to report based upon: Type of Property Holding period

I.R.C. § 1231 Property p. 93

General rule provides that net gains on business asset dispositions are capital gains, net losses are ordinary losses. The best of both worlds!!

I.R.C. § 1231 Transactionsp. 94

List of 8 § 1231 transactions

Excluded Property p. 94

List of 4 Taxpayer’s Inventory Property held for sale to

customers Copyright; compositions; letters U.S. gov’t publication

Example 1pp. 95-96

Josephine bought land $65K 11/15/2016 State acquired said land

11/30/2017 for $66K

Figure 2.1 p. 96

2017

Excluded Gain pp. 96-97

I.R.C. § 1239 gains treated as ordinary income are not included in § 1231 gain netting. I.R.C. § 1239 treats 3 relationships

as related

Nonrecaptured § 1231 Lossesp. 97

If there is a net § 1231 gain in any of the 5 subsequent years following a net §1231 loss, the gain is treated as ordinary income to the extent of the prior nonrecaptured § 1231 loss. Surviving spouse doesn’t recapture

deceased spouse’s share.

Practitioner Note p. 97

Be aware to look back if your client has not been with you for 5 years, the software may not prompt you.

Example 3 p. 97

Gary Gentry facts in Figure 2.2, show gains and losses for 2011-2017

Depreciation Recapture p. 100

Taxpayers disposing of depreciable property resulting in a taxable transaction for §§ 1245 and 1250 will/may recognize ordinary gains. Cross-reference §§ 1252, 1254 and

1255 recapture

I.R.C. § 1245 Propertypp. 101-102

I.R.C. § 1245 Property includes Depreciable personal property

I.R.C. §§ 167 or 168 Real property depreciated via

I.R.C. §§ 167 or 168

Recomputed Basispp. 101-102

RB includes a property’s adjusted basis plus any adjustments List of 19 allowed or allowable

adjustments

Example 4 - Recapture pp. 102-103

Sandy Pitt purchased a loader in 2013 Expensed $10,000 of $120,000

cost in 2013 Used MACRS 5-year Sold for $65,000 in 2017

Figure 5 Realized Gainp.102

1245

Sandy’s Form 4797 p. 103

Practitioner Note p. 103

I.R.C. § 197 Intangibles If a taxpayer acquires an

intangible while disposing of another intangible at a loss; the loss can’t be recognized; must increase basis of retained intangible.

I.R.C. § 1250 Recapturep. 104

§ 1250 property is defined to be real property that is not and has not ever been § 1245 property. E.g. greenhouse is single-

purpose structure and as such is § 1245 property.

§ 1250 recapture p. 104

Gain realized on a § 1250 property disposition is recaptured as ordinary income. The portion of the gain which is

equivalent to allowable SL depreciation is taxed at a maximum of 25% Excess gain of purchase price is §

1231capital gain; taxed at max of 20%

Observation p. 104

Most § 1250 property is depreciated using SL and is not subject to ordinary income recapture. Unrecaptured rule applies: max tax

is 25%

Example 5 p. 104

Farm building purchased for $100,000, land $20,000 in 2007 MACRS 150% DB, over 20 year

life, half-year convention Sold for $138,000 in 2017: $28K

land, $110K for building

Belle Pepper’s 4797 Continued

Installment Sales p. 109

When a nondealer sells business property under an installment contract rules apply to the reporting of depreciation recapture and any gain.

Installment Reporting p. 109

Taxpayers may use installment reporting if: Not a dealer Sale results in a gain At least one payment deferred to tax

year after sale Deferred gain cannot be depreciation

recapture

Taxable Gain Computation p. 109

Calculate and report installment income on IRS Form 6252 If property is a business asset, sale

also reported on Form 4797

Taxable Gain Computation p. 109

Other issues Charge interest, report on

Schedule B Gain calculated using ordinary

and capital gains rules and rates when payment received Holding period ends at time of

sale, no change ST to LT

Depreciation Recapture p. 109

Only § 1231 gains may be reported on the installment method § § 1245 and 1250 recapture is

calculated and recognized in the year of sale, report on Form 4797

Example 6 pp. 110-114

2017 Fred Fabricator retired and sells machinery to Bert Builder for $320,000. $100,000 down $44,000 annually plus interest

Over next 5 years, begin 2018

§

Example 6 (Continued) pp. 112-114

See Forms 4797 and 6252

I.R.C. § 179 Recapture p. 115

If property, which the taxpayer expensed, falls below 50% business use by the taxpayer, recapture of the excess amount that was expensed over allowable deductions without § 179 expensing.

Example 7 p. 115

In 2017 Whitney reduced business use of the boat to 40%. She must recapture $4,032. This subject to SE tax

I.R.C. § 280F Listed Property Recapture p. 116

Listed property subject to MACRS that is used for more than 50% in qualifying business use is eligible for both accelerated depreciation § 179 expense deduction. If use falls below 50%, only SL

depreciation is allowed, excess must be recaptured.

Example 8 p. 117

Rita bought a computer for $4,000 in 2015 for both personal and business use. Business use was 70% $2,800 business basis $1,000 of that expensed, $1,800

MACRS 5-year prop.

Example 8 continued

In 2017, Rita’s business use drops to 20%. Therefore, she must recapture §

179 deduction and recalculate under MACRS SL method.

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Issue 4: Livestock Transactionspp. 118-132

Livestock acquisition Livestock sales Casualty gain or loss

Livestock acquisitionpp. 118-119

Reason for acquiring determines treatment Example 1: Purchased for resale

Sale price $13,000Purchase price - 8,000Gain $ 5,000

Depreciation pp. 119-120

Depreciation begins when first placed in service for intended use Immature livestock IRS saysWhen draft animals can be workedWhen dairy animals can be milkedWhen breeding animals can bred Taxpayers could argue depreciation begins when

dairy animals can be bred

Example 2: Placed in Servicep. 120

Livestock sales pp. 120-124

Purpose for holding livestock determines where a sale is reported. Held for sale: Schedule F (Form 1040) Dairy, breeding, sport, or draft: Form 4797 < 12 (24) months: Form 4797, Part II > 12 (24) months:

• Depreciated: Form 4797, Part III• Not depreciated: Form 4797, Part I

Example 3: Dairy livestockpp. 121-124

Calves held for sale $12,150Raised cows $48,600Purchased cows $ 6,800Culled heifers $8,500Schedule F, line 2: 12,150Form 4797, line 2: 48,600Form 4797, line 10: 8,500

Form 4797 p. 124

Line 20 6,800Line 21 15,000Line 22 15,000Line 23 0Line 24 6,800Line 25a 15,000Line 25b, 30, 31, 13 6,800

Casualty gain or losspp. 124-128

Dairy, breeding, sport, or draft livestock is treated the same as other trade or business property: Loss is decrease in FMV (limited to basis) Gain is insurance or government payments

in excess of basis

Example 4: Dairy Livestockpp. 124-127

Cost FMV Insur. Basis2 raised cows 0 2,200 2,000 0Purchased cow 2,100 1,100 1,000 0Purchased cow 2,100 1,100 1,000 1,029

Form 4684 p. 125

A B CLine 20 1,029Line 21 2,000 1,000 1,000Line 22 2,000 1,000Line 23 1,100Line 24 0Line 25 1,100Line 26 1,029Lines 27 & 28 29

I.R.C. § 1231 Netting p. 127

Net casualty gains are netted with other I.R.C. § 1231 gains (unless they are deferred) Net casualty losses are ordinary deduction

Example 5: Casualty gain deferred pp. 127-128

Insurance proceeds received $3,000Adjusted tax basis - 0Gain realized $3,000Gain deferred - 3,000Gain recognized $ 0Cost of replacement property $4,500Gain deferred - 3,000Basis of replacement property $1,500

Property held for salepp. 128-129

Generally, no special tax treatment of involuntary conversion Reimbursements reported on Schedule F Usually no gain or loss because items have

zero basis

Weather-related provisionspp. 129-131

Two provisions Involuntary conversion (applies only to

draft, breeding, or dairy animals) 1-year postponement of gain (applies to all

livestock)

Involuntary Conversionpp. 129-130

Sale must be due to weather conditions (disaster declaration is not required) Replaced within 2 years New livestock used for same purpose

(breeding, dairy, or draft) Applies only to sales in excess of normal Must attach a statement to tax return

1-year deferral p. 130

Must be disaster declaration Applies only to sales in excess of normal Must attach statement to tax return

Livestock deaths due to disease pp. 131-132

Not a casualty because not sudden It is an involuntary conversion Section 1231 property gain or loss is

netted with other section 1231 gains and losses Reported on Schedule F or Form 4797

Issue 6: Inherited Propertypp. 134-135

Basis of inherited property is adjusted to the value on the date of death or alternate valuation date Automatic long-term capital gain holding

period Exception: income in respect of a

decedent (IRD)

Example 1: Growing cropspp. 134-135

Example 2 p. 135

Date-of-death basis adjustment for equipment Does receive a step up in basis Combine not eligible for Section

179

Issue 7: Casualty Gains and Losses pp. 136-141

Home p. 138

Form 4684 Line 2 55,000Line 3 150,000Line 4 95,000

Home p. 141

Form 8949 Line 2 -95,000

Schedule D Line 10 -95,000Line 11 95,000Line 16 0

Cropland: Form 4684 p. 139

Line 23 7,000,000Line 24 6,880,000Line 25 120,000Line 26 120,000Line 27 120,000Line 37 - 120,000Line 38a - 120,000

Form 4684 Section B p. 139

Bins Shed Equip.Line 20 15,000 29,250 0Line 21 50,000 45,000 40,000Line 22 35,000 15,750 40,000Lines 29, 30, and 31 15,750

Form 4797 p. 140

Line 13 75,000Line 14 - 104,250Line 17 - 29,750

Issue 9: Going Out of Business Case Study p. 143

Tax consequences are dramatically different from one plan to another This issue compares the tax cost of

alternatives

Business assets p. 144

FMV $1,261,000Basis - 258,475Gain $1,002,525§ 1245 $ 417,275§ 1231 $ 585,250

Lump-sum sale pp. 144-145

Income tax $294,810SE tax 8,554Total tax $303,364

Sale over 2 years pp. 146-147

Income tax $263,352SE tax 8,554Total tax $271,906

Installment sale of non-deprec. property pp. 148-149

Income tax $278,822SE tax 8,554Total tax $287,376

Sale of deprec. property over 10 years pp. 150-151

Income tax $257,969SE tax 8,554Total tax $266,523

Summary p. 152

Total Tax After Tax Inc.Lump-sum sale $303,364 $1,383,463Sale over 2 years $271,906 $1,390,436Installment sale $287,376 $1,584,507Sale over 10 years $266,523 $1,586,627

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