Capital gains tax is always one to watch and monitor during political elections and changes in Congress. This fall’s election is one that could serve as a change agent for tax rates, capital gains included. If you are thinking about selling your farm, in either 2020 or 2021, then you should give the capital gains tax impact strong consideration.
Current capital gains tax rates vary from 0% to 20% depending on your income tax bracket. Most people fall into the 15% or 20% federal rate. In addition some states have capital gains taxes, they might range from 3% - 5%. As a general rule of thumb, I think about 25% as an all-in capital gains tax rate. This means that if you sell your farm today for $8,500/acre and you inherited it 30 years ago at $1,500/acre you might pay 25% of the gain ($7,000/acre) to the federal and state governments in capital gains taxes. This equates to paying $1,750/acre in taxes – that is a significant cut to your net!!
Of course some people utilize Internal Revenue Code Section 1031 tax deferred exchanges to delay paying the capital gains and reinvest in other “like-kind” investment/income producing real estate. If this is interesting to you, please call me at 800-424-2324 to discuss how to do it. However if you want or need to simply take cash out of the farm sale capital gains taxes are a factor.
Some reports show that if we have a different President and a change in Congress to Democrat controlled, capital gains tax rates may increase substantially. There is certainly no guarantee, but regardless of who is in office Congress will likely need to raise taxes in multiple ways to fund the enormous federal debt. If you look back historically, the current capital gains tax rates are the lowest in my memory at their current rates. For much of my 32 years in business the federal capital gains tax rate was 28%.
It is unknown what the election brings or what will happen with tax rates in 2021. We DO KNOW what the current capital gains tax rates are for 2020 sales and they remain at the low end of the range. If you are thinking about a sale this fall/winter or off-season I encourage you to calculate your basis, learn what your capital gains tax consequence might be, and if significant, I suggest a sale that closes in 2020.
If you need help working through these calculations, Halderman Can Help. Call your local Halderman Area Representative or me in our main office at 800-424-2324 to talk about your specific needs, your property and your options.