Minding Ag's Business

Why Seniors Keep a Grip on Land

By  Marcia Zarley Taylor
Elderly landowners have incentives to have lifetime capital gains forgiven at deat. The alternative is paying state and federal tax capital gains rates topping 30% in many states--before complex adjustments for phased out itemized deductions.
Elderly landowners have incentives to have lifetime capital gains forgiven at deat. The alternative is paying state and federal tax capital gains rates topping 30% in many states--before complex adjustments for phased out itemized deductions.



The link between aging farm landowners and capital gains rates is no coincidence: Many elderly farmers simply can't bear to share the proceeds of a wise lifetime investment when their heirs can have all past capital gains forgiven at death. This sentiment has become even more pronounced since good Iowa farmland runs $10,000/acre today but could have a tax basis as tiny as $200/acre if acquired in the 1950s. Is it any wonder that more than half of Iowa's farmland is owned by seniors who qualify to collect Social Security and 80-year-olds are some of the most aggressive bidders at public auctions?

As the attached map from the Tax Foundation illustrates, the combination of state and federal taxes in effect on 2013 returns varies by state but can easily approach 30% or more in many locales, with California, New York, Oregon and Minnesota collecting the largest shares. California's combined 33% top rate would be the third highest among industrialized countries, the Tax Foundation reports.

However, even those rates probably underestimate the real shock on capital gains, some CPAs and attorneys report.

David Brown, a Des Moines, Iowa attorney who specializes in 1031 tax-free exchanges, told the Iowa Land Expo in January that taxes can easily whittle a $1 million farm gain down to $660,000 in his state. That's because there's a potential tax of 34% for income over $450,000. He thinks 1031 exchanges are "an indispensible safety valve" for those who want to postpone taxes but need to trade properties.

New capital gains rates apply for those with high adjusted gross incomes, but not necessarily high taxable incomes, others point out. For taxpayers who hit the new 39.6% marginal rate, the maximum capital gains rate is 20% (plus the new 3.8% Medicare surtax, if applicable), for a maximum 23.8% federal capital gains rate or almost 25% if the taxpayer has a large amount of itemized deductions.

California's top rate adds another 13.3% to that burden, so it's not unrealistic to pay a total capital gains rate bill approaching 40% in that state, says Paul Neiffer, a CPA and agribusiness principal with CliftonLarsonAllen LLP in Yakima, Wash. "It's hard to do a quick calculation," Neiffer said. "You'll need a computer to calculate your personal capital gains rate, I'll tell you that."

To get more details on state-by-state rankings of capital gains taxes go to http://taxfoundation.org/…

Follow Marcia Taylor on Twitter@MarciaZTaylor

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Elderly landowners have incentives to have lifetime capital gains forgiven at deat. The alternative is paying state and federal tax capital gains rates topping 30% in many states--before complex adjustments for phased out itemized deductions.

Comments

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Bill Billson
4/7/2014 | 3:45 PM CDT
Marcia, you are interpreting the numbers incorrectly or you dont understand financial statements. The 114k figure does not include any farm capital purchasrs or expenses. Basically it calculates the total wage you need to cover your personal spendng so essentially you would need a job in the top 1% to maintain that lifestyle. FAMINE...LOL
Bill Billson
4/7/2014 | 3:45 PM CDT
Marcia, you are interpreting the numbers incorrectly or you dont understand financial statements. The 114k figure does not include any farm capital purchasrs or expenses. Basically it calculates the total wage you need to cover your personal spendng so essentially you would need a job in the top 1% to maintain that lifestyle. FAMINE...LOL
Bill Billson
4/7/2014 | 3:44 PM CDT
Marcia, you are interpreting the numbers incorrectly or you dont understand financial statements. The 114k figure does not include any farm capital purchasrs or expenses. Basically it calculates the total wage you need to cover your personal spendng so essentially you would need a job in the top 1% to maintain that lifestyle. FAMINE...LOL
T Kuster
4/3/2014 | 7:37 AM CDT
Most people can figure out if a land investment does not pay for itself, the logical solution is to cash out of an investment that has doubled in value many times over just a few years. The constitution does not guarantee that all or any land investments should guarantee perpetual prosperity forever for you and your dependents.
doug taylor
3/20/2014 | 5:42 PM CDT
How do you pay for the accumulated debt that is still attached to the land? How about family living expense? A few article ago, these future retires made $27 dollars / acre profits. Do you think the social security check will be large enough to pay living expense? Maybe cash rents just makes ends meet?
Unknown
3/19/2014 | 6:24 PM CDT
Re Don Thompson; LMAO!
T Kuster
3/18/2014 | 12:01 PM CDT
Perhaps if taxpayers did not have to listed to pathetic lying politicians claim they are saving the taxpayers money by cutting the direct payment farm schemes while at the same time squandering billions more on new farm investment/profit guaranteeing schemes that target billions to millionaires, taxpayers might be more willing to pay capital gain taxes.
Don Thompson
3/18/2014 | 11:18 AM CDT
Bonnie, I bet you can't stop.
Bonnie Dukowitz
3/18/2014 | 6:00 AM CDT
And Pedro; My initial comment was very brief, broad and general, with sarcasm. As written it includes a lot of politicians and bureaucrats. Amazing how some will attempt to disagree by name calling, which was the point I later attempted to make. If one thinks we should have politicians spending and controlling more of the taxpayers money, more power to you. Contribute as you like, however I will not respond more to what this exchange is evolving to be.
Pedro Sanchez
3/17/2014 | 1:06 PM CDT
And Bonnie, you feel your initial comment was a solid contribution and discussion point? You are throwing out a pretty pointed and demeaning insult as well. Where I come from, that is being called a hypocrite.
Bonnie Dukowitz
3/17/2014 | 8:29 AM CDT
Seems rather outragous, a few individuals cannot make a contribution for discussion, only pointed, demeaning insults with an extreme stuporous attitude.
T Kuster
3/17/2014 | 7:14 AM CDT
Being agriculture's spendaholics are in control in DC with most of this agricultural spending being capitalized into higher land values what more could senior land owners such as Bonnie want?
Bonnie Dukowitz
3/17/2014 | 6:41 AM CDT
No complaint! Just an opinion based on numbers. Some people are just cowards and do not have enough convictions to show themselves and critisize those who have the courage to stand up for what they believe. Then use alibis for their cowardice. Sorry for abusing you blog, Marcia.
Unknown
3/16/2014 | 7:38 PM CDT
Whoa, whoa, whoa.....before you complain too loudly about the spendaholics, it would be wise to remember just who receives a big slice of that loot. Outrageous!
Bonnie Dukowitz
3/12/2014 | 5:27 AM CDT
As long as spendaholics control D.C. and state capitals, a supply of loot needs to be swiped from somewhere.
T Kuster
3/11/2014 | 10:54 PM CDT
Also relevant is the feds zirp policy of stealing from savers by not paying them for the use of their money. Not only is the fed stealing from savers by not paying them for the use of their money they are deflating the value of it through QE and other deflationary policies. Very hard to justify turning real estate into cash.