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Tax Considerations of Farm Transfers

This article discusses the various tax considerations involved in transferring farm assets, including sales, gifts, transfers at death, and trades. It addresses property taxes, sales taxes, employment taxes, self-employment tax, income taxes, gift taxes, and death taxes. Examples are provided to illustrate the tax consequences of different types of transfers. The article also covers installment sales, transfer by gift, federal gift tax, federal and Wisconsin income tax, transfer at death, federal estate tax, marital deduction, and Wisconsin estate tax.

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Tax Considerations of Farm Transfers

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  1. Tax Considerations of Farm TransfersPhilip E. HarrisCenter for Dairy ProfitabilityDepartment of Agricultural and Applied EconomicsUniversity of Wisconsin-Madison/Extension

  2. Alternatives for transferring farm assets p. 1 • Sale • Gift • Transfer at death • Trade • Transferring to a business entity

  3. Taxes imposed on farmers p. 1 • Property taxes • Sales taxes • Employment taxes • Self-employment tax • Income taxes • Gift taxes • Death taxes

  4. Sale p. 1 • No gift or death tax consequences • But there are income tax and self-employment tax consequences

  5. Example 1: Land p. 1 • Sale Price $295,000 • Basis 11,800 • Gain $283,200

  6. Example 2: Cows pp. 1-2 • Sale price of cows $130,000 • Income tax basis 0 • Gain $130,000

  7. Example 3: Machinery p. 2 • Sale price $58,934 • Basis - 8,434 • Gain $ 50,500

  8. Character of gain or loss p. 2 • Ordinary income (10% - 39.6%) • Capital gain (0% - 28%) • Self-employment income (15.3%) • (13.3% for 2011 and 2012)

  9. Example 4 p. 2 • Gwen’s wages $100,000 • Dale’s SE income $175,000 • Wage base $113,700 • SS tax rate 12.4% • SS tax $ 14,099

  10. Example 4 p. 3 • SE income $175,000 • Medicare rate × 2.9% $ 5,075 • SE income $175,000 • Threshold – 150,000 • Excess $ 25,000 • Addtnl rate x 0.9% 225 • Total Medicare tax $5,300

  11. Three categories p. 3 • Subject to ordinary tax rates and to self-employment tax

  12. Example 5 p. 3 • Gain from calves is subject to income tax and SE tax • Gain from sale of heifers and cows is not in this category

  13. Three categories p. 3 • Subject to ordinary tax rates and to self-employment tax • Subject to ordinary income tax rates but not SE tax • Depreciation recapture • Young breeding stock

  14. Example 6 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

  15. Example 7 p. 4 • Heifers that are younger than 24 months fall into this category

  16. Three categories pp. 3-4 • Subject to ordinary tax rates and to self-employment tax • Subject to ordinary income tax rates but not SE tax • Capital gain or ordinary loss

  17. Example 8 p. 4 • Gain on house $ 120,000 • Loss on shed - 2,000 • Loss on barn - 5,000 • Gain on land 48,000 • Net gain $ 161,000

  18. Example 8 p. 4 • Gain on house $ 0 • Loss on shed - 2,000 • Loss on barn - 5,000 • Gain on land 5,000 • Net loss $ - 2,000

  19. Net investment income tax pp. 4-5 • Beginning in 2013 there is a 3.8% tax • on net investment income • but only if AGI > $200,000 • ($250,000 MFJ; $125,000 MFS)

  20. Example 9 pp. 4-5 • AGI without sale $50,000 • Net investment income $5,000 • Gain from sale $161,000 • AGI with sale $211,000 • Threshold 200,000 • Excess $ 11,000 • Net inv. inc. tax ($5,000 x 3.8%) $190

  21. Installment sale p. 5 • Gain is reported as payments are received • Example 10: $28,320 of gain • in each of 10 years

  22. Transfer by Gift p. 5 • Gift tax consequences • Income tax consequences

  23. Federal Gift Tax pp. 5-6 • Annual exclusion: $14,000/year • Marital deduction: unlimited • Lifetime exclusion: • 2002 - 2010: $1,000,000 • 2011: $5,000,000 • After 2011: $5,000,000 (indexed)

  24. Example 14 p. 6 • Value of gifts $ 575,000 • Annual exclusion - 26,000 • Taxable gift $ 549,000 • Gift tax $ 173,930 • Applicable credit - 1,730,800 • Gift tax due $ 0

  25. Federal and Wisconsin Income Tax pp. 6-7 • Generally, donor’s income tax basis is carried over to donee. • Exceptions: • FMV < Donor’s basis • Gift taxes due

  26. Example 15 p. 7 • Value of land $295,000 • Carryover basis $ 11,800

  27. Transfer at Death p. 7 • Estate tax consequences • Income tax consequences

  28. Federal estate tax p. 7 • YearsExclusion • 2006-2008 $2,000,000 • 2009 $3,500,000 • 2010-2011 $5,000,000 • After 2011 $5,000,000 (indexed)

  29. Example 16 p. 7 • Value of estate $4,439,500 • Lifetime gifts 549,000 • Total $5,014,550 • Tax on $ 5,014,550 $1,735,893 • Applicable credit - 1,730,800 • Federal estate tax $ 5,893

  30. Marital Deduction p. 7 • Any amount passing to • surviving spouse is deducted from the taxable estate.

  31. Wisconsin Estate Tax p. 8 • Wisconsin estate tax expired • at the end of 2007.

  32. Federal and Wisconsin Income Tax p. 8 • Assets passing at death receive an income tax basis equal to the date-of-death value. • Both halves of marital property get a date-of-death value basis.

  33. Federal and Wisconsin Income Tax p. 8 • For deaths in 2010, if the executor elected out of the estate tax, assets get a carry-over basis. • But, by election, • $1,300,000 is added • $3,000,000 is added

  34. Example 18 p. 8 • AssetDale’sGwen’sAfter • Feed 0 0 23,550 • Cattle 7,000 7,000 188,400 • Mach. 8,434 8,434 117,868 • House 37,500 37,500 175,000 • Land 60,00060,000750,000 • Total 112,934 112,934 1,254,818

  35. Trade p. 9 • If farm assets are traded for • “like-kind” assets, • gain or loss is rolled over • into the acquired property.

  36. Example 20 p. 9 • Trade-in value $25,000 • Basis in tractor - 2,000 • Realized gain $23,000 • Boot $15,000 • Basis in planter $17,000

  37. Transferring to aBusiness Entity p. 10 • Assets can be exchanged for ownership in an entity without triggering recognition of gain

  38. Example 24 p. 10 • Grandpa owns 42% of LLC • Dale owns 58% of LLC

  39. Example 26 p. 11 • Sale price of 20% $ 73,100 • Grandpa’s basis 0 • Grandpa’s gain $ 73,100

  40. Example 27 p. 11 • Value of 20% interest $ 73,100 • Annual exclusion - 28,000 • Taxable gift $ 45,100

  41. Questions?

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