• Strong demand for land, low interest rates and low income tax rates can be beneficial for buyers and sellers of agricultural land.
For example, if you buy a parcel of land for $4,000 per acre and hold it longer than one year and sell it for $5,000 per acre, there is a long-term capital gain of $1,000 per acre.
There can be deductions to this gain to reduce it slightly, but for the purposes of this article the gain is $1,000 per acre. The tax rate applied to the gain is based on the income tax rate bracket of the payor, or in this case the seller of the farmland.
If you sell 50 head of farm-raised cull cows for $1,300 per head, the income of $65,000 receives tax treatment just like long-term capital gain.
The federal government levies a tax on long-term capital gains based on the taxpayer’s taxable income bracket.
Under current law (until the end of 2012), if your adjusted gross income is less than $69,000 for a married couple ($34,500 single), the tax rate for long-term capital gains is 0 percent (10 percent and 15 percent tax bracket).
If your income is higher than $69,000, the rate is 15 percent (25 percent tax bracket and above). Capital gains tax rates have not been this low since 1933. These rates will continue until the end of 2012. Without changes to the tax law by Congress, the top rate will increase to 20 percent beginning in 2013.
As an illustration, let’s say that you bought 60 acres of land for $1,000 per acre and are considering selling it for $2,000 per acre and you have owned the land for 5 years and your taxable income after deductions and exemptions for income taxes is less than $69,000.
The land sale creates a long-term capital gain of $1,000 per acre. So, there is a total capital gain of $60,000 (60 acres x $1,000/acre).
If you sell the land in early 2012 and receive 100 percent of the proceeds before the end of 2012 and your taxable income for income taxes is less than $69,000, you will pay no federal income tax on the capital gain.
If you have $68,000 of taxable income and $60,000 of capital gain you are only paying income tax on the $8,000.
How can this happen?
That $60,000 of capital gain is tax free because you are in a lower tax bracket (up to the top of the 15 percent bracket). This is only effective under current law, which expires at the end of 2012. (Remember that you use up your standard and itemized deductions before you have taxable income.)
These tax rates can be very beneficial to someone considering exiting the dairy business.
Let’s use the example of the cull cow sale from up above. The 50 head sold for a total of $65,000. If that dairy couple has taxable income in 2011 of less than $69,000 (income after exemptions and deductions), they will pay no income tax on the $65,000 of raised cow sales.
If they sell raised cows with a total value of $100,000, they will pay $0 tax on the first $69,000 and a tax rate of 15% on the remaining $31,000, or $4,650 in income tax. In this example, they can sell $100,000 of raised cows and pay $4,650 of income tax on that sale. That is an average tax rate of 4.65 percent.
Unless Congress changes the tax law, the long-term capital gains rate (used for raised, cull cows that are sold, for example) increases to 10 percent from 0 percent and to 20 percent from 15 percent after 2012.
Based on a review of historical documentation, a number of factors have come together to provide unique circumstances that can be beneficial for both buyers and sellers of agricultural land.
Strong demand for land, interest rates at almost all time lows and long-term federal capital gains tax rates not seen since 1933 are all involved.
These examples are for educational purposes only. Consult a qualified tax or investment professional before embarking on capital purchases or the sale of capital assets.