Capital Gains Taxes – What changes mean to farmland?

By Howard Halderman

02 /15 /21

As the Biden Administration begins their work and Congress is starting up one of the hotly debated issues is the potential for tax increases. The federal and state government support over the past year was critical to keeping our economy moving, the general and agricultural economies, during the COVID crises. How do we begin to pay for all the debt incurred by the federal government? One way is to increase taxes and capital gains is one area that may see increases.

Currently long-term federal capital gains tax rates are 15% or 20%, depending on your tax bracket. Most farmland falls into the long-term capital gains category. If you sell farmland odds are high your income tax bracket increases to the 20% level for capital gains. In addition, you may pay state capital gains taxes, depending on your state of residence tax code and potentially the Medicare Tax (3.8%). This could equate to 23-28% total tax on the gain.

Red barn on a farm in rural York County, Pennsylvania.-1This is the tax rate on the gain in your farmland asset. If your father paid $1,000/acre for the farm you inherited, and assumed his tax basis, and you sell for $8,000/acre your taxable gain is $7,000/acre. At 25% for simply math your owe $1,750/acre in capital gains taxes. If the federal rate returns to 28% as it was in previous tax code this 8% increase equates to an additional $560/acre in cap gains tax. If the rate is higher the tax increases accordingly.

We cannot predict if, when or how much capital gains taxes might change. We do know that President Biden mentioned increasing the capital gains tax rate during his campaign and since the election. Does that happen in 2021 or 2022? We know what the rates are now and that likely they only move higher in the future. Therefore, if you are thinking about selling the farm for whatever reason in the next 1-3 years doing so this calendar year might be a prudent choice from a tax efficiency standpoint.

Farmland is experiencing a nice uptick in value (+5% to +10%), supplies for sale are almost nonexistent and interest rates are as low as ever. It is a seller’s market so if you need help analyzing your options Halderman Can Help. Don’t get caught on November 1st wanting to sell and close before year end at the same time many others do! 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.