Minding Ag's Business

Why Seniors Keep a Grip on Land

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?

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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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