Land sale and capitol gains question

Butch(OH) · Jul 28, 2023

I'm at the very beginning process of figuring out the best way to sell a farm I have owned for quite some time. Auction, regular real estate listing and private sale via land contract are on the table. A consideration is the capitol gains tax as it is going to be quite large. I will of course be seeking professional advise but wondering if anyone here has experiance with a land contract sale, specifically I am wondering when I would owe the capitol gains tax on a land contract deal? At the beginning, or the end?

wp6529 · Jul 28, 2023

You need to talk to a proper accountant to get the details for your particular situation. One key thing to keep in mind is the $250k individual / $500k married one-time capital gains exemption. If you haven't used it previously you may not have nearly the capital gains tax issue you might think, but there are some qualifiers so it may or may not be applicable which is why you need to talk to a professional.

Butch(OH) · Jul 28, 2023

Thanks, I will obviously have an
accountant involved in this deal. At this
point I am looking at the sale in a broad
manner, not locked onto anything and
definitely NOT seeking legal advise on
this site. Just wondering when the taxes
would be due if sold on land contract?

rrlund · Jul 28, 2023

We sold some land to our son and daughter in law last year for cash and plan to sell more to them on a contract. I asked my tax guy. He said the interest is taxable as regular income and the principle is subject to capital gains.

504 · Jul 28, 2023

Just keep in the back of your head that you might think of a land contract as income for several years. Both mine dad and his second wife thought they were good for taxes till both of their buyers paid off the properties in 5 years. She thought hers was locked in and couldnt be paid off early,she was wrong

John T · Jul 28, 2023

Sorry, although I've bought and sold several parcels using a land contract and prepared several land contracts for clients Im NOT a CPA or Tax Professional so cant answer the tax question. However, if there are any here ???? maybe some CPA's or tax experts or gents who will Google it and give you an answer they find ???

While they were used more in the past, nowadays I advise some (not all depends on situation) clients to steer away from land contracts as there are several alternative legal options available, subject to all sorts of tax issues and income needs.

Sounds like you're on top of this and plan to consult professionals GOOD IDEA

Any legal related or electrical threads typically draw out the most responses both lay, professional as well as Google users so good luck in your sale

Best Wishes

John T

Gomer · Jul 28, 2023

Read Tax Topic 409. It answers a lot of questions.

Butch(OH) · Jul 28, 2023

---or gents who will Google it and give you an answer they find ???---

LOL John T, I am aware of that!

We will be at the Lagrange show in a couple weeks. Hope to see you there. Wife and I will be in a Kubota RTV

WNYBill · Jul 28, 2023

I believe the one time exemption only works if it is your permanent residence, not second home or vacation home. A good real estate agent can give you some guidance, but you need an estate lawyer. You're going to be happy Joe got the 840 million new IRS agents.

John T · Jul 28, 2023

or gents who will Google it and give you an answer they find ???---

LOL John T, I am aware of that!

Arent we all

Ive been to that show a couple times and really liked it, no plans this time so catch you some other time I hope

John T

Michael Soldan · Jul 28, 2023

Everything you have ever spent on your farm in terms of maintenance ,repairs , drainage , bulldozing , updates for hydro , plumbing , roofing....you get the picture here , can be claimed against the capital gain and thus reduce the capital gain you have to pay.If you paid interest on your farm loan it can be deducted. We have a cottage that someday will have to be sold and we keep a file of everything we spend on it , even down to light bulbs ! WE have roofed, replaced windows , did flooring etc , all deductable from the capital we have gained. Good luck and it won't be as bad as you think. When I sold my farm , by the time we deducted everything I owed $55oo. A relief ! I had thousands in drainage expenses , barn roofs , new machinery shed....and so on and so on

Bruce from Can. · Jul 28, 2023

Capital gains tax is to me, about the most unreasonable tax. I dont remember the government ever lending a hand to help me pick stones, cut junk trees out of fences and take out fences to improve the value of my farm property, but somehow without putting in any effort or facing any risk, the government feels entitled to part of the increased value I have put into my property. Tics me off !

glennster · Jul 28, 2023

what are your plans for the proceeds? take the cash and run or re invest? that will determine your best course of action. i recently sold my rental properties, did a 1031 exchange into a Delaware Statutory Trust, deferred the capitol gains and get a check every month. i also get depreciation too.

ss55 · Jul 28, 2023

Keep in mind that with a land contract you will retain title of the property until all the payments are completed. If land prices drop the land contract will likely be renegotiated to a lower total amount. That happened during the 1980s farm crisis.

Capital gains taxes are much lower than taxes on earned income (wages). Depending on the value of the sale and if you are still working, spreading out payments over two or more years or to when you are not working can save a lot of extra taxes on your earned income. Your accountant might be able to find a low risk annuity or similar investment that spreads out your tax bill over several years or into the future.

State taxes depend on which state you live in.

Butch(OH) · Jul 28, 2023

The plan is to sell and invest in part of tbe proceeds somewhere that provides a monthly check to replace my wifes income and insurance. The rest? who knows? I am not that far along with this. Land contract came up in a conversation and I just wonderd when the tax would be due of sold in that manner.

John T · Jul 28, 2023

If land prices drop the land contract will likely be renegotiated to a lower total amount

I always drafted fixed price contracts (BOTH Buyer and Sellers wishes) I prepared for clients and all those when I was a buyer or seller, but I'm a believer in the Freedom of Contract doctrine so people are free to contract as they wish is fine with me.

Take care nice chatting with you

John T

Bob Bancroft · Jul 28, 2023

The only thing I can say to this is I had an attorney tell me years ago he would have nothing to do with a land contract. If the seller wants to hold the mortgage for the buyer, he was fine with that. It would entail a deed and a mortgage, but no land contract.

SHALER · Jul 28, 2023

I am pretty sure the capital gains on a land contract sale are recognized pro rata as you receive the payments. Lets say you sell for $100K and get $50K one year and $50K the next. Half the capital gains will be owed in year one the other half in year two. also for anyone reading this.....land contract from a buyers perspective are not a smart thing to do in most cases. that is because as ss55 points out the owner retains title. Lets say Butch you do execute a land contract and then a couple years later crash your car in to a school bus and get sued, the party that sues you may be awarded damages, and if you cant pay them and have to sell the farm to raise cash, the buyer on the land contract is out of luck for all the money he has paid you. I would be happy to sell my land on a land contract, but I would never buy land on a land contract.

Geo-TH,In · Jul 28, 2023

I recently sold a rental property, cash sale.
Look out, long term federal capital gains 15%
Plus regular state and local taxes.

And it pushed my income into a higher tax bracket which played games with my medicare.

Please talk to your CPA.
My CPA advised me not to sell it because I would take a tax hit.
He said it's better for me not to sell. My kids will not pay very much inheritance taxes.
I went to college with my CPA. He's been doing my taxes forever.

If you want to sell one property and buy another property there is a way to get the job done and not pay capital gains.

Talk to professionals. CPA or a title company.

Each to their own. I once bought a property on contract. Sellers died, his kid filed bankruptcy, and that left me a MESS. A divorce could be messy too.
NEVER will sell on contract and I leave my kids in a mess like I was in.

Willow Lane · Jul 28, 2023

Is there a liveable house on the farm? if so look at moving there for two years. If you have lived in it for 2 years there is a $250,000 exemption, $500,000 for married filing jointly. Google Sale of Home Exclusion. I do not know all the requirements, but it sounds like you want to sell the property, but don't have to do it next week, so look at all the options and don't jump until you have all your questions answered. Good luck.

Land sale and capitol gains question

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