You’re selling your ranch, land, farm or equestrian property. It’s no surprise that you’ll have to deal with the tax implications of that sale and most sellers want to know what’s involved before listing. The Capital Gains Tax Rates are currently 25% on state and federal combined. Even though we have no income tax, Texas landowners still must pay federal taxes on the gains under certain situations.
The sale of property is considered the same as with any other property; you must pay sales tax on that sale. However, it depends on several factors when selling, including how long you’ve had the property and personal residence exemption. If you’ve held property for less than one year, a short-term capital gain treatment will apply. You get an exemption from capital gains tax if it involves personal residences and if you meet the requirements. You are allowed to make up to $250,000 for single taxpayers or $500,000 for joint taxpayers of the sale of the home without paying any capital gains tax on the sale but you must have lived in the home and use it as your primary residence for at least two years of the past five. To maximize the amount of tax-free dollars you can get on a primary residence, you may include additional acres with the home but verify that this complies with your tax accountant and real estate professional.
Another tax implication is 1031 tax exchanges. This is a common way to avoid these types of taxes on the sale of the property. In order to take advantage of this you must essentially swap one property for another similar property. There’s usually cash involved to account for any difference in value but as long as you structure the transaction correctly you can typically defer the tax in the future. Even though it doesn’t make it tax-free, it just simply defers it until you sell if you don’t purchase a similar property in the future.
If the home or is not your primary residency and personal use is limited to no more than 14 overnights per year the home is eligible for a 1031 tax exchange. It is considered and treated as a second home for federal tax purposes.
There are various tax rates and tax treatments which can apply to the different type of assets involved in the sale of a ranch or a farm. It is how the owner allocates the sale price to the assets of the ranch that will determine the taxes they may ultimately owe. Taxpayers will need to take into an account depreciation recapture, federal capital gains tax and any state taxes. (Contact a tax professional to see if you will owe any of these).
Appreciate or Depreciated Property
If you sell a highly appreciated or depreciated property it can lend a pretty hefty tax bill. Taxes due could see upwards of 50%! If you feel that you may be at risk for this type of sale, talk to a tax attorney before listing to be very about your options.
There are a lot of other unique selling situations where taxes may be exempt or deferred, so before listing your farm make sure you understand all the tax implications of selling. Contact me today to find out more about real estate land taxes or exemptions if you’re planning on selling your Texas ranch or farmland.