Selling Farmland? Key Tax Considerations Every Landowner Should Understand

For many families, farmland is more than a financial asset. It represents decades of hard work, family history, and often a significant portion of a family’s net worth. When the decision is made to sell, most landowners focus on achieving the highest possible sale price. However, understanding the tax consequences before the sale can be just as important as the sale price itself.

The First Question: How Did You Acquire the Land?

Your tax basis depends on whether you purchased or inherited the property.

Inherited

• Basis is generally the fair market value at the date of the decedent’s death
• May receive a step-up in basis
• Decades of appreciation may never be subject to capital gains tax when you sell

Examples of Capital Improvements:

• Tile drainage systems
• Buildings & structures
• Conservation improvements
• Land leveling
• Irrigation systems

A Simple Formula:

Sale Price - Adjusted Basis = Taxable Gain
The larger the gain, the larger the potential tax liability.

Gather These Records Before You Sell

• Closing statements
• State documents
• Tile, drainage and improvement records
• Purchase records
• Appraisals
• Property tax records

What Taxes Could Apply?

Both federal and Minnesota taxes may apply to a farmland sale.tal tax burden associated with a farmland sale.

Minnesota Income Taxes

• Minnesota generally taxes capital gains as part of taxable income rather than providing a separate preferential capital gains rate.
• As a result, Minnesota income taxes can represent a meaningful portion of the total tax burden associated with a farmland sale.

Five Tax Planning Strategies to Discuss Before You Sell

Every landowner’s situation is unique, but several planning opportunities may be available.

1. 1. NEW: IRC 1062 – Four-Year Tax Payment Election
   Receive the proceeds at closing. but potentially pay the federal tax attributable to qualifying gain over four years.
2. 2. Installment Sale
   Receive payments over time, which can spread gain recognition across multiple years.
3. 3. 1031 Exchange
   Reinvest in qualifying real estate and potentially defer capital gains.
4. 4. Charitable Planning
   Gift land or use charitable vehicles, which may provide potential deductions and capital-gain benefits.
5. 5. Time the Sale
   Coordinate with retirement, lower-income years, losses, deductions or estate planning to help manage your overall tax picture.

Thoughtful planning before the sale gives you more options, and more control over the outcome.

Selling to a Beginning Farmer?
You May Qualify for a Minnesota Tax Credit.

Minnesota offers a tax credit to qualifying sellers who sell agricultural assets to a beginning farmer. This can be a valuable opportunity to support the next generation of farmers while also reducing your tax liability.

Eligable Assets May Include:

Final Thoughts