tax considerations of farm transfers philip e. harris university of wisconsin- madison/extension
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![Page 1: Tax Considerations of Farm Transfers Philip E. Harris University of Wisconsin- Madison/Extension](https://reader034.vdocuments.site/reader034/viewer/2022051401/56649d485503460f94a24130/html5/thumbnails/1.jpg)
Tax Considerationsof Farm Transfers
Philip E. HarrisUniversity of Wisconsin-
Madison/Extension
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Alternatives for transferring farm assets p. 1Alternatives for transferring farm assets p. 1
1. Sale2. Gift3. Transfer at death4. Trade5. Transferring to a business
entity
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Taxes imposed on farmersp. 1
Taxes imposed on farmersp. 1
1. Property taxes2. Sales taxes3. Employment taxes4. Self-employment tax5. Income taxes6. Gift taxes7. Death taxes
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Sale p. 1Sale p. 1
• No gift or death tax consequences
• But there are income tax and self-employment tax consequences
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Example 1: Cowsp. 1Example 1: Cowsp. 1
Sale price of cows $130,000
Income tax basis 0
Gain $130,000
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Example 2: Machinery p. 1Example 2: Machinery p. 1
Sale price $58,934
Basis - 8,434
Gain $ 50,500
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Example 3: Land p. 2Example 3: Land p. 2
Sale Price $295,000
Basis 11,800
Gain $283,200
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Character of gain or lossp. 2
Character of gain or lossp. 2
• Ordinary income (10% - 35%)
• Capital gain (0% - 28%)
• Self-employment income (15.3%)
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Three categories pp. 2-3Three categories pp. 2-3
1. Subject to ordinary tax rates and to self-employment tax
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Example 4 p. 2Example 4 p. 2
• Gain from calves is subject to income tax and SE tax
• Gain from sale of heifers and cows is not in this category
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Three categories pp. 2-3Three categories pp. 2-3
1. Subject to ordinary tax rates and to self-employment tax
2. Subject to ordinary income tax rates but not SE taxa. Depreciation recaptureb. Young breeding stock
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Example 5 p. 3Example 5 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
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Example 6 p. 3Example 6 p. 3
• Heifers that are younger than 24 months fall into this category
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Three categories pp. 2-3Three categories pp. 2-3
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
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Example 7 p. 3Example 7 p. 3
Gain on house $ 120,000
Loss on shed - 2,000
Loss on barn - 5,000
Gain on land 48,000
Net gain $ 161,000
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Example 7 pp. 3-4Example 7 pp. 3-4
Gain on house $ 0
Loss on shed - 2,000
Loss on barn - 5,000
Gain on land 5,000
Net loss $ - 2,000
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Installment sale p. 4Installment sale p. 4
Gain is reported as payments are received
Example 8: $28,320 of gain
in each of 10 years
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Giftp. 4Giftp. 4
• Gift tax consequences
• Income tax consequences
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Federal Gift Tax pp. 4-5Federal Gift Tax pp. 4-5
• Annual exclusion: $13,000/year
• Marital deduction: unlimited
• Lifetime exclusion: $1,000,000
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Example 12 pp. 5-6Example 12 pp. 5-6
Value of gifts $ 575,000Annual exclusion - 26,000Taxable gift $ 549,000Gift tax $ 173,930Applicable credit - 345,800Gift tax due $ 0
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Federal and Wisconsin Income Tax p. 6Federal and Wisconsin Income Tax p. 6
Generally, donor’s income tax basis is carried over to donee.
• Exceptions:
– FMV < Donor’s basis
– Gift taxes due
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Example 13 p. 6Example 13 p. 6
Value of land
$295,000
Basis
$ 11,800
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Transfer at Death p. 6Transfer at Death p. 6
• Estate tax consequences
• Income tax consequences
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Federal estate tax p. 6Federal estate tax p. 6
Years Exclusion2002-2003 $1,000,0002004-2005 $1,500,0002006-2008 $2,000,0002009 $3,500,0002010 No estate tax2011 and after $1,000,000
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Example 15 p. 7Example 15 p. 7
Value of estate $3,416,000Lifetime gifts 549,000Total $3,965,000Tax on $3,965,000 $1,665,050Unified credit (2009) - 1,445,800Federal estate tax $ 209,250
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Marital Deduction p. 7Marital Deduction p. 7
Any amount passing to
surviving spouse is deducted from the taxable estate.
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Example 16 p. 7Example 16 p. 7
Value of estate $3,416,000Lifetime gifts 549,000Total $3,965,000Marital deduction - 465,000Taxable estate $3,500,000Tax on $3,500,000 $1,445,800Unified credit (2009) - 1,445,800Federal estate tax $ 0
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Wisconsin Estate Tax p. 7Wisconsin Estate Tax p. 7
• Beginning October 1, 2002, Wisconsin imposed estate tax on estates $675,000 or more.
• Wisconsin estate tax expired at the end of 2007.
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Federal and Wisconsin Income Tax pp. 7-8Federal and Wisconsin Income Tax pp. 7-8
• For deaths before 2010, the income tax basis is adjusted to the date-of-death value.
• Both halves of marital property gets a date-of-death basis.
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Example 17 p. 8Example 17 p. 8
Asset Dale’s Gwen’s AfterFeed 0 0 23,550Cattle 7,000 7,000 188,400Mach. 8,434 8,434 117,868House 37,500 37,500 175,000Land 60,000 60,000 750,000Total 105,934 105,934 1,254,818
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Federal and Wisconsin Income Tax p. 8Federal and Wisconsin Income Tax p. 8
For deaths in 2010, assets get a carry-over basis.
– But, by election,
• $1,300,000 is added
• $3,000,000 is added
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Trade p. 9Trade p. 9
If farm assets are traded for
“like-kind” assets,
gain or loss is rolled over
into the acquired property.
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Example 19 p. 9Example 19 p. 9
Trade-in value $25,000
Basis in tractor - 2,000
Realized gain $23,000
Boot $15,000
Basis in planter $17,000
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Transferring to aBusiness Entity p. 10Transferring to aBusiness Entity p. 10
Assets can be exchanged for ownership in an entity without triggering recognition of gain
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Example 23 p. 10Example 23 p. 10
• Grandpa owns 42% of LLC
• Dale owns 58% of LLC
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Example 23 p. 10Example 23 p. 10
Feed Cattle
FMV $47,100 $365,500
Basis - 0 - 14,000
Gain $47,100 $351,500
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Example 25 p. 10Example 25 p. 10
Sale price of 20% $ 73,100
Grandpa’s basis 0
Grandpa’s gain $ 73,100
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Example 26 p. 11Example 26 p. 11
Value of 20% interest $ 73,100
Annual exclusion - 26,000
Taxable gain $ 47,100