transfer of farm assets · inheritance [irc § 1014] fmv on dod, or 6 months later. may use irc §...
TRANSCRIPT
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TRANSFER OF FARM ASSETS
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Issue 1: Buying and Selling Farmland pp. 87- 89
Cost Basis Purchase [IRC § 1012]
Paid in: cash, debt or otherGift [IRC § 1015]
Generally donor’s basis
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Issue 1: Buying and Selling Farmland p. 87
Cost Basis Inheritance [IRC § 1014]
FMV on DOD, or 6 months laterMay use IRC § 2032A, special use valuation on qualifying property to reduce, no more than $1,120,000 in 2017.
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Issue 1: Buying and Selling Farmland p. 88
Purchase Costs included in basis Real Estate Taxes paid by
purchaser owed by seller. If seller reimburses, then RE
taxes are deductible
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Issue 1: Buying and Selling Farmland p. 88
Settlement Costs can be included in basis: Abstract fees Legal fees Recording fees Surveys Title Insurance
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Issue 1: Buying and Selling Farmland p. 88
Loan Costs are not included in basis, taxpayer can amortize: Points Mortgage Insurance Loan Assumption fees Credit Report costs Fees for appraisal required by lender Fees to refinance a mortgage
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Issue 1: Buying and Selling Farmland p. 89
Practitioner Notes Growing Crops
Gain on unharvested crops sold at the same time as land is § 1231 gain
Option PaymentsGain or loss is capital [Treas. Reg. §
1.1234-1]Unless asset is subject to § 1231
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Issue 1: Buying and Selling Farmland p. 89
Sale of Land with CRP Contract If the buyer succeeds in interest to the
seller’s CRP, the new owner takes over. If the buyer does not succeed, then the
seller may be required to repay CRP payments received plus interest and any additional costs.
USDA Notice CRP-819 provides for early termination: buyer a next gen farmer
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Issue 2: Disposition of Converted Wetlands pp. 90-92
Wetland mitigation banking uses a market-based approach to restore, create, or enhance wetlands in one place to compensate for unavoidable impacts at another location.
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Issue 2: Disposition of Converted Wetlands p. 90
Typically, mitigation banking system is administered at the state level. USDA currently recognizes eight
wetland mitigation banks See list Operates at zero loss
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IRC §1257 p. 90
Any gain on the disposition of converted wetlands or highly erodible cropland shall be treated as ordinary income. Any loss recognized (converted
wetlands/erodible cropland) shall be treated as a long-term capital loss
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Converted Wetland p. 91
Any converted wetland as defined in § 1201(4) of the Food Security Act of 1985. Activities resulting in conversion Held by any other person what
used land for farming purposes
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Example 1 p. 91
Dave owns a farm on the outskirts of Sioux Falls, SD Basis is $1,800 per acre Prime for development 2012 purchases one wetland credit to
drain a one acre wetland ($11,000) Cost to tile and drain the acre ($2,000)
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Example 1 p. 91
2017: Dave sells 10 acres to a developer. The sale includes the one acre of converted wetland. Sale price is $15,000 per acre.
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Example 1 p. 91
Dave reports the sale of nine acres on Form 4797, Part I. The sales price is $135,000 ($15,000 x 9 acres). His basis deduction is $16,200 ($1,800 x 9 acres).
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Example 1 p. 91
The sale price for the converted wetland acre is $15,000. Because the gain is from the sale of a converted wetland, the gain is taxed as ordinary income. Dave reports the $200 gain ($15,000 − $14,800 basis) on Form 4797.
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Example 1 p. 91
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Example 2 p. 92
Same facts as Example 1 except the land was sold for $11,500/Acre. Dave reports the sale of the nine
acres on Form 4797, Part I.
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Example 2 p. 92
One acre is converted wetland with a $14,800 basis. The sale of the wetland acre results
in a $3,300 ($11,500 − $14,800) long-term capital loss. Dave reports the loss on Form
8949, Sales and Other Dispositions of Capital Assets.
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Example 2 p.92
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Example 2 p. 92
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Issue 3: Form 4797p. 93
Form 4797 calculates both gains and losses of business property dispositions; gains and losses may come from other forms to be netted on Form 4797
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Introduction p. 93
Capital and Ordinary transactions are separated; SE tax generally isn’t applicable
unless recapture of §§ 179 or 280F deductions is required.
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Figure 1 p. 93
Determine where to report based upon: Type of Property Holding period
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I.R.C. § 1231 Property p. 93
General rule provides that net gains on business asset dispositions are capital gains, net losses are ordinary losses. The best of both worlds!!
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I.R.C. § 1231 Transactionsp. 94
List of 8 § 1231 transactions
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Excluded Property p. 94
List of 4 Taxpayer’s Inventory Property held for sale to
customers Copyright; compositions; letters U.S. gov’t publication
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Example 1pp. 95-96
Josephine bought land $65K 11/15/2016 State acquired said land
11/30/2017 for $66K
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Figure 2.1 p. 96
2017
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Excluded Gain pp. 96-97
I.R.C. § 1239 gains treated as ordinary income are not included in § 1231 gain netting. I.R.C. § 1239 treats 3 relationships
as related
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Nonrecaptured § 1231 Lossesp. 97
If there is a net § 1231 gain in any of the 5 subsequent years following a net §1231 loss, the gain is treated as ordinary income to the extent of the prior nonrecaptured § 1231 loss. Surviving spouse doesn’t recapture
deceased spouse’s share.
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Practitioner Note p. 97
Be aware to look back if your client has not been with you for 5 years, the software may not prompt you.
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Example 3 p. 97
Gary Gentry facts in Figure 2.2, show gains and losses for 2011-2017
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Depreciation Recapture p. 100
Taxpayers disposing of depreciable property resulting in a taxable transaction for §§ 1245 and 1250 will/may recognize ordinary gains. Cross-reference §§ 1252, 1254 and
1255 recapture
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I.R.C. § 1245 Propertypp. 101-102
I.R.C. § 1245 Property includes Depreciable personal property
I.R.C. §§ 167 or 168 Real property depreciated via
I.R.C. §§ 167 or 168
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Recomputed Basispp. 101-102
RB includes a property’s adjusted basis plus any adjustments List of 19 allowed or allowable
adjustments
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Example 4 - Recapture pp. 102-103
Sandy Pitt purchased a loader in 2013 Expensed $10,000 of $120,000
cost in 2013 Used MACRS 5-year Sold for $65,000 in 2017
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Figure 5 Realized Gainp.102
1245
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Sandy’s Form 4797 p. 103
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Practitioner Note p. 103
I.R.C. § 197 Intangibles If a taxpayer acquires an
intangible while disposing of another intangible at a loss; the loss can’t be recognized; must increase basis of retained intangible.
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I.R.C. § 1250 Recapturep. 104
§ 1250 property is defined to be real property that is not and has not ever been § 1245 property. E.g. greenhouse is single-
purpose structure and as such is § 1245 property.
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§ 1250 recapture p. 104
Gain realized on a § 1250 property disposition is recaptured as ordinary income. The portion of the gain which is
equivalent to allowable SL depreciation is taxed at a maximum of 25% Excess gain of purchase price is §
1231capital gain; taxed at max of 20%
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Observation p. 104
Most § 1250 property is depreciated using SL and is not subject to ordinary income recapture. Unrecaptured rule applies: max tax
is 25%
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Example 5 p. 104
Farm building purchased for $100,000, land $20,000 in 2007 MACRS 150% DB, over 20 year
life, half-year convention Sold for $138,000 in 2017: $28K
land, $110K for building
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Belle Pepper’s 4797 Continued
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Installment Sales p. 109
When a nondealer sells business property under an installment contract rules apply to the reporting of depreciation recapture and any gain.
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Installment Reporting p. 109
Taxpayers may use installment reporting if: Not a dealer Sale results in a gain At least one payment deferred to tax
year after sale Deferred gain cannot be depreciation
recapture
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Taxable Gain Computation p. 109
Calculate and report installment income on IRS Form 6252 If property is a business asset, sale
also reported on Form 4797
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Taxable Gain Computation p. 109
Other issues Charge interest, report on
Schedule B Gain calculated using ordinary
and capital gains rules and rates when payment received Holding period ends at time of
sale, no change ST to LT
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Depreciation Recapture p. 109
Only § 1231 gains may be reported on the installment method § § 1245 and 1250 recapture is
calculated and recognized in the year of sale, report on Form 4797
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Example 6 pp. 110-114
2017 Fred Fabricator retired and sells machinery to Bert Builder for $320,000. $100,000 down $44,000 annually plus interest
Over next 5 years, begin 2018
§
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Example 6 (Continued) pp. 112-114
See Forms 4797 and 6252
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I.R.C. § 179 Recapture p. 115
If property, which the taxpayer expensed, falls below 50% business use by the taxpayer, recapture of the excess amount that was expensed over allowable deductions without § 179 expensing.
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Example 7 p. 115
In 2017 Whitney reduced business use of the boat to 40%. She must recapture $4,032. This subject to SE tax
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I.R.C. § 280F Listed Property Recapture p. 116
Listed property subject to MACRS that is used for more than 50% in qualifying business use is eligible for both accelerated depreciation § 179 expense deduction. If use falls below 50%, only SL
depreciation is allowed, excess must be recaptured.
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Example 8 p. 117
Rita bought a computer for $4,000 in 2015 for both personal and business use. Business use was 70% $2,800 business basis $1,000 of that expensed, $1,800
MACRS 5-year prop.
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Example 8 continued
In 2017, Rita’s business use drops to 20%. Therefore, she must recapture §
179 deduction and recalculate under MACRS SL method.
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17
1936840
1096
17
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Issue 4: Livestock Transactionspp. 118-132
Livestock acquisition Livestock sales Casualty gain or loss
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Livestock acquisitionpp. 118-119
Reason for acquiring determines treatment Example 1: Purchased for resale
Sale price $13,000Purchase price - 8,000Gain $ 5,000
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Depreciation pp. 119-120
Depreciation begins when first placed in service for intended use Immature livestock IRS saysWhen draft animals can be workedWhen dairy animals can be milkedWhen breeding animals can bred Taxpayers could argue depreciation begins when
dairy animals can be bred
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Example 2: Placed in Servicep. 120
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Livestock sales pp. 120-124
Purpose for holding livestock determines where a sale is reported. Held for sale: Schedule F (Form 1040) Dairy, breeding, sport, or draft: Form 4797 < 12 (24) months: Form 4797, Part II > 12 (24) months:
• Depreciated: Form 4797, Part III• Not depreciated: Form 4797, Part I
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Example 3: Dairy livestockpp. 121-124
Calves held for sale $12,150Raised cows $48,600Purchased cows $ 6,800Culled heifers $8,500Schedule F, line 2: 12,150Form 4797, line 2: 48,600Form 4797, line 10: 8,500
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Form 4797 p. 124
Line 20 6,800Line 21 15,000Line 22 15,000Line 23 0Line 24 6,800Line 25a 15,000Line 25b, 30, 31, 13 6,800
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Casualty gain or losspp. 124-128
Dairy, breeding, sport, or draft livestock is treated the same as other trade or business property: Loss is decrease in FMV (limited to basis) Gain is insurance or government payments
in excess of basis
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Example 4: Dairy Livestockpp. 124-127
Cost FMV Insur. Basis2 raised cows 0 2,200 2,000 0Purchased cow 2,100 1,100 1,000 0Purchased cow 2,100 1,100 1,000 1,029
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Form 4684 p. 125
A B CLine 20 1,029Line 21 2,000 1,000 1,000Line 22 2,000 1,000Line 23 1,100Line 24 0Line 25 1,100Line 26 1,029Lines 27 & 28 29
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I.R.C. § 1231 Netting p. 127
Net casualty gains are netted with other I.R.C. § 1231 gains (unless they are deferred) Net casualty losses are ordinary deduction
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Example 5: Casualty gain deferred pp. 127-128
Insurance proceeds received $3,000Adjusted tax basis - 0Gain realized $3,000Gain deferred - 3,000Gain recognized $ 0Cost of replacement property $4,500Gain deferred - 3,000Basis of replacement property $1,500
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Property held for salepp. 128-129
Generally, no special tax treatment of involuntary conversion Reimbursements reported on Schedule F Usually no gain or loss because items have
zero basis
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Weather-related provisionspp. 129-131
Two provisions Involuntary conversion (applies only to
draft, breeding, or dairy animals) 1-year postponement of gain (applies to all
livestock)
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Involuntary Conversionpp. 129-130
Sale must be due to weather conditions (disaster declaration is not required) Replaced within 2 years New livestock used for same purpose
(breeding, dairy, or draft) Applies only to sales in excess of normal Must attach a statement to tax return
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1-year deferral p. 130
Must be disaster declaration Applies only to sales in excess of normal Must attach statement to tax return
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Livestock deaths due to disease pp. 131-132
Not a casualty because not sudden It is an involuntary conversion Section 1231 property gain or loss is
netted with other section 1231 gains and losses Reported on Schedule F or Form 4797
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Issue 6: Inherited Propertypp. 134-135
Basis of inherited property is adjusted to the value on the date of death or alternate valuation date Automatic long-term capital gain holding
period Exception: income in respect of a
decedent (IRD)
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Example 1: Growing cropspp. 134-135
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Example 2 p. 135
Date-of-death basis adjustment for equipment Does receive a step up in basis Combine not eligible for Section
179
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Issue 7: Casualty Gains and Losses pp. 136-141
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Home p. 138
Form 4684 Line 2 55,000Line 3 150,000Line 4 95,000
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Home p. 141
Form 8949 Line 2 -95,000
Schedule D Line 10 -95,000Line 11 95,000Line 16 0
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Cropland: Form 4684 p. 139
Line 23 7,000,000Line 24 6,880,000Line 25 120,000Line 26 120,000Line 27 120,000Line 37 - 120,000Line 38a - 120,000
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Form 4684 Section B p. 139
Bins Shed Equip.Line 20 15,000 29,250 0Line 21 50,000 45,000 40,000Line 22 35,000 15,750 40,000Lines 29, 30, and 31 15,750
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Form 4797 p. 140
Line 13 75,000Line 14 - 104,250Line 17 - 29,750
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Issue 9: Going Out of Business Case Study p. 143
Tax consequences are dramatically different from one plan to another This issue compares the tax cost of
alternatives
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Business assets p. 144
FMV $1,261,000Basis - 258,475Gain $1,002,525§ 1245 $ 417,275§ 1231 $ 585,250
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Lump-sum sale pp. 144-145
Income tax $294,810SE tax 8,554Total tax $303,364
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Sale over 2 years pp. 146-147
Income tax $263,352SE tax 8,554Total tax $271,906
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Installment sale of non-deprec. property pp. 148-149
Income tax $278,822SE tax 8,554Total tax $287,376
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Sale of deprec. property over 10 years pp. 150-151
Income tax $257,969SE tax 8,554Total tax $266,523
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Summary p. 152
Total Tax After Tax Inc.Lump-sum sale $303,364 $1,383,463Sale over 2 years $271,906 $1,390,436Installment sale $287,376 $1,584,507Sale over 10 years $266,523 $1,586,627
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