TRANSFER OF FARM ASSETS

Transcription

1 TRANSFER OF FARM ASSETS

2 Issue 1: Buying and Selling Farmland pp Cost Basis Purchase [IRC 1012] Paid in: cash, debt or other Gift [IRC 1015] Generally donor s basis

3 Issue 1: Buying and Selling Farmland p. 87 Cost Basis Inheritance [IRC 1014] FMV on DOD, or 6 months later May use IRC 2032A, special use valuation on qualifying property to reduce, no more than $1,120,000 in 2017.

4 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

5 Issue 1: Buying and Selling Farmland p. 88 Settlement Costs can be included in basis: Abstract fees Legal fees Recording fees Surveys Title Insurance

6 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

7 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 Payments Gain or loss is capital [Treas. Reg ] Unless asset is subject to 1231

8 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

9 Issue 2: Disposition of Converted Wetlands pp 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.

10 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

11 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

12 Converted Wetland p. 91 Any converted wetland as defined in 1201(4) of the Food Security Act of Activities resulting in conversion Held by any other person what used land for farming purposes

13 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)

14 Example 1 p : Dave sells 10 acres to a developer. The sale includes the one acre of converted wetland. Sale price is $15,000 per acre.

15 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).

16 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.

17 Example 1 p. 91

18 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.

19 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.

20 Example 2 p.92

21 Example 2 p. 92

22 Issue 3: Form 4797 p. 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

23 Introduction p. 93 Capital and Ordinary transactions are separated; SE tax generally isn t applicable unless recapture of 179 or 280F deductions is required.

24 Figure 1 p. 93 Determine where to report based upon: Type of Property Holding period

25 I.R.C 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!!

26 I.R.C Transactions p. 94 List of transactions

27 Excluded Property p. 94 List of 4 Taxpayer s Inventory Property held for sale to customers Copyright; compositions; letters U.S. gov t publication

28 Example 1 pp Josephine bought land $65K 11/15/2016 State acquired said land 11/30/2017 for $66K

29 Figure 2.1 p

30 Excluded Gain pp I.R.C gains treated as ordinary income are not included in 1231 gain netting. I.R.C treats 3 relationships as related

31 Nonrecaptured 1231 Losses p. 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.

32 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.

33 Example 3 p. 97 Gary Gentry facts in Figure 2.2, show gains and losses for

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35 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

36 I.R.C Property pp I.R.C Property includes Depreciable personal property I.R.C. 167 or 168 Real property depreciated via I.R.C. 167 or 168

37 Recomputed Basis pp RB includes a property s adjusted basis plus any adjustments List of 19 allowed or allowable adjustments

38 Example 4 - Recapture pp 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

39 Figure 5 Realized Gain p

40 Sandy s Form 4797 p. 103

41 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.

42 I.R.C Recapture p property is defined to be real property that is not and has not ever been 1245 property. E.g. greenhouse is singlepurpose structure and as such is 1245 property.

43 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%

44 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%

45 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

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50 Belle Pepper s 4797 Continued

51 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.

52 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

53 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

54 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

55 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

56 Example 6 pp 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

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58 Example 6 (Continued) pp See Forms 4797 and 6252

59 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.

60 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

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63 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.

64 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.

65 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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68 Issue 4: Livestock Transactions pp Livestock acquisition Livestock sales Casualty gain or loss

69 Livestock acquisition pp Reason for acquiring determines treatment Example 1: Purchased for resale Sale price $13,000 Purchase price - 8,000 Gain $ 5,000

70 Depreciation pp Depreciation begins when first placed in service for intended use Immature livestock IRS says When draft animals can be worked When dairy animals can be milked When breeding animals can bred Taxpayers could argue depreciation begins when dairy animals can be bred

71 Example 2: Placed in Service p. 120

72 Livestock sales pp 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

73 Example 3: Dairy livestock pp Calves held for sale $12,150 Raised cows $48,600 Purchased cows $ 6,800 Culled heifers $8,500 Schedule F, line 2: 12,150 Form 4797, line 2: 48,600 Form 4797, line 10: 8,500

74 Form 4797 p. 124 Line 20 6,800 Line 21 15,000 Line 22 15,000 Line 23 0 Line 24 6,800 Line 25a 15,000 Line 25b, 30, 31, 13 6,800

75 Casualty gain or loss pp 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

76 Example 4: Dairy Livestock pp Cost FMV Insur. Basis 2 raised cows 0 2,200 2,000 0 Purchased cow 2,100 1,100 1,000 0 Purchased cow 2,100 1,100 1,000 1,029

77 Form 4684 p. 125 A B C Line 20 1,029 Line 21 2,000 1,000 1,000 Line 22 2,000 1,000 Line 23 1,100 Line 24 0 Line 25 1,100 Line 26 1,029 Lines 27 & 28 29

78 I.R.C Netting p. 127 Net casualty gains are netted with other I.R.C gains (unless they are deferred) Net casualty losses are ordinary deduction

79 Example 5: Casualty gain deferred pp Insurance proceeds received $3,000 Adjusted tax basis - 0 Gain realized $3,000 Gain deferred - 3,000 Gain recognized $ 0 Cost of replacement property $4,500 Gain deferred - 3,000 Basis of replacement property $1,500

80 Property held for sale pp Generally, no special tax treatment of involuntary conversion Reimbursements reported on Schedule F Usually no gain or loss because items have zero basis

81 Weather-related provisions Two provisions pp Involuntary conversion (applies only to draft, breeding, or dairy animals) 1-year postponement of gain (applies to all livestock)

82 Involuntary Conversion pp 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

83 1-year deferral p. 130 Must be disaster declaration Applies only to sales in excess of normal Must attach statement to tax return

84 Livestock deaths due to disease pp 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

85 Issue 6: Inherited Property pp 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)

86 Example 1: Growing crops pp

87 Example 2 p. 135 Date-of-death basis adjustment for equipment Does receive a step up in basis Combine not eligible for Section 179

88 Issue 7: Casualty Gains and Losses pp

89 Home p. 138 Form 4684 Line 2 55,000 Line 3 150,000 Line 4 95,000

90 Home p. 141 Form 8949 Line 2-95,000 Schedule D Line 10-95,000 Line 11 95,000 Line 16 0

91 Cropland: Form 4684 p. 139 Line 23 7,000,000 Line 24 6,880,000 Line ,000 Line ,000 Line ,000 Line ,000 Line 38a - 120,000

92 Form 4684 Section B p. 139 Bins Shed Equip. Line 20 15,000 29,250 0 Line 21 50,000 45,000 40,000 Line 22 35,000 15,750 40,000 Lines 29, 30, and 31 15,750

93 Form 4797 p. 140 Line 13 75,000 Line ,250 Line 17-29,750

94 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

95 Business assets p. 144 FMV $1,261,000 Basis - 258,475 Gain $1,002, $ 417, $ 585,250

96 Lump-sum sale pp Income tax $294,810 SE tax 8,554 Total tax $303,364

97 Sale over 2 years pp Income tax $263,352 SE tax 8,554 Total tax $271,906

98 Installment sale of non-deprec. property pp Income tax $278,822 SE tax 8,554 Total tax $287,376

99 Sale of deprec. property over 10 years pp Income tax $257,969 SE tax 8,554 Total tax $266,523

100 Summary p. 152 Total Tax After Tax Inc. Lump-sum sale $303,364 $1,383,463 Sale over 2 years $271,906 $1,390,436 Installment sale $287,376 $1,584,507 Sale over 10 years $266,523 $1,586,627

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