Sale of Development Rights:Sale of Development Rights:Tax IssuesTax Issues

Dennis Pennington, MSUEDennis Pennington, MSUE

Agriculture & Natural Resources AgentAgriculture & Natural Resources Agent

Barry CountyBarry County

What is PDR Program?What is PDR Program?

Landowner bundle of rightsLandowner bundle of rightsRight to developRight to developCan be bought, sold, relinquished (voluntary)Can be bought, sold, relinquished (voluntary)

Enabled by P.A. 262Enabled by P.A. 262 In Barry County:In Barry County:

Ordinance adopted December 2002Ordinance adopted December 2002Created CAPB to administer county PDR Created CAPB to administer county PDR

programprogram

Farmland ConversionFarmland Conversion

355,942 total acres355,942 total acres 1982 = 188,096 acres1982 = 188,096 acres 1997 = 1997 = 164,815 acres164,815 acres

23,281 acres23,281 acres 12.4% decrease12.4% decrease ~ 1 township~ 1 township 4.25 acres/day4.25 acres/day 0 acres by 21030 acres by 2103

PDR Program-Barry CountyPDR Program-Barry County

Fall 2003Fall 2003 35 applications35 applications 5,143 acres5,143 acres

QuestionsQuestions Capital gainCapital gain Estate planningEstate planning

Income vs. Capital GainIncome vs. Capital Gain

Income tax paid on earned income (ordinary Income tax paid on earned income (ordinary income)income) CornCorn MilkMilk ApplesApples WagesWages

Capital gain - from the sale of capital itemsCapital gain - from the sale of capital items TractorTractor Raised livestockRaised livestock Real EstateReal Estate

Tax Bracket: Example 2Tax Bracket: Example 2Married Filing JointlyMarried Filing Jointly

Enter Taxable Income (after deductions & exemptions)Enter Taxable Income (after deductions & exemptions)

$500,000$500,000

RangeRange BracketBracket AmountAmount

$ - $ - to to $ 14,300 $ 14,300 10%10% $ 1,430 $ 1,430

$ 14,300$ 14,300 to to $ 58,100 $ 58,100 15%15% $$ 6,570 6,570

$ 58,100$ 58,100 to to $ 117,250 $ 117,250 25%25% $ 14,788 $ 14,788

$ 117,250 $ 117,250 to to $ 178,650 $ 178,650 28%28% $ 17,192 $ 17,192

$ 178,650$ 178,650 to to $ 319,100 $ 319,100 33%33% $ 46,349 $ 46,349

  over over $ 319,100 $ 319,100 35%35% $ 63,315 $ 63,315

TotalTotal $ 149,643 $ 149,643

Example 2Example 2

$-

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$500,000

Taxable Income

Tax Amount Calculation

35%

33%

28%

25%

15%

10%

Basis Allocation ExampleBasis Allocation Example

Example:Example: Purchased 100 A in 1990 for $300,000Purchased 100 A in 1990 for $300,000 Basis allocated to:Basis allocated to:

ResidenceResidence $100,000$100,000 Farm Building #1Farm Building #1 $40,000$40,000 TimberTimber $50,000$50,000

Original purchase priceOriginal purchase price == $300,000$300,000 minus allocated itemsminus allocated items -- $190,000$190,000 Remaining BasisRemaining Basis == $110,000$110,000 Or $1,100 per acreOr $1,100 per acre

Capital GainsCapital Gains

Under Revenue Ruling 77-414, gain from sale of Under Revenue Ruling 77-414, gain from sale of Property Development Rights is subject to Property Development Rights is subject to capital gains tax rates (see handout).capital gains tax rates (see handout).

Capital gains rates as of May 6, 2003Capital gains rates as of May 6, 2003

Ordinary Rate Ordinary Rate BracketBracket

Married Married Filing Filing JointlyJointly

SingleSingle

10% & 15%10% & 15% 5%5% 5%5%

> 15%> 15% 15%15% 15%15%

15% Tax Bracket 15% Tax Bracket Ceiling (2004)Ceiling (2004)

58,10058,100 29,05029,050

ExampleExample

Ordinary Income: $30,000Ordinary Income: $30,000 Capital Gain: $60,000Capital Gain: $60,000

Range BracketIncome

Tax

CapitalGain Tax

RateCapital

Gain Tax

$ - to $ 14,300 10% $ 1,430

$ 14,300 to $ 58,100 15% $ 2,355 5% $ 1,405

$ 58,100 to $ 117,250 25% $ - 15% $ 4,785

$ 117,250 to $ 178,650 28% $ -

$ 178,650 to $ 319,100 33% $ -

over   $ 319,100 35% $ -    

Total $ 3,785 $ 6,190

Deferred Like Kind ExchangeDeferred Like Kind Exchange

IRC 1031IRC 1031Proceeds held by qualified intermediaryProceeds held by qualified intermediaryReplacement property must be identified Replacement property must be identified

within 45 days of sale of development within 45 days of sale of development rightsrights

Exchange of property must be within 180 Exchange of property must be within 180 days from the date of sale ~ gives you 135 days from the date of sale ~ gives you 135 days to close the deal on the new propertydays to close the deal on the new property

Other IssuesOther Issues

Social SecuritySocial SecurityCapital gain reduces excludable amountCapital gain reduces excludable amount

Donation of Development RightsDonation of Development RightsEstate PlanningEstate Planning

Pass farmland to sibling wanting to farmPass farmland to sibling wanting to farmPass development rights value to othersPass development rights value to othersSell for reduced $ before death?Sell for reduced $ before death?Let property be inherited through will?Let property be inherited through will?Basis?Basis?

Social Security IssuesSocial Security Issues

Schedule F IncomeSchedule F Income 20,00020,000 Interest IncomeInterest Income 4,0004,000Social SecuritySocial Security 16,00016,000TotalTotal 40,00040,000Excludable social securityExcludable social security

(16,000)(16,000)Total taxable incomeTotal taxable income 24,00024,000Ordinary TaxOrdinary Tax 2,8852,885

Social Security IssuesSocial Security Issues

Schedule F IncomeSchedule F Income 20,00020,000 Interest IncomeInterest Income 4,0004,000Sale of Development RightsSale of Development Rights 60,00060,000Social SecuritySocial Security 16,00016,000TotalTotal 100,000100,000Excludable social securityExcludable social security (2,800)(2,800)Total taxable incomeTotal taxable income 97,20097,200Ordinary TaxOrdinary Tax 4,8654,865

Questions?Questions?

Email: Email: pennin34@msu.edupennin34@msu.edu

Web: msue.msu.edu/barryWeb: msue.msu.edu/barry

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