Some changes with capital gains tax rates may affect some farms and especially those considering retirement and passing the farm on to the next generation or selling the farm outright.
There are two types of capital gains and multiple rates. The two major types of capital gains are usually referred to as short-term and long-term.
Short-term is applied to those investment(s)/asset(s) held for one year or less (or in the case of cattle or horses, 24 months). The taxable rates for these are treated at the ordinary income tax rates (0 percent - 39.6 percent)
Long-term capital gains rates have changed by adding a new 20 percent bracket plus a possible 3.8 percent Medicare tax on net investment income brought on by the Affordable Care Act. For the 2013 and future years, long-term capital gains rates are as follows:
- Capital Gains Rate of zero percent for capital gains income that falls within the 10 percent or 15 percent income tax brackets.
- Capital Gains Rate of 15 percent for capital gains income that falls within the 25 percent, 28 percent, 33 percent or 35 percent income tax brackets.
- Capital Gains Rate of 20 percent for capital gains income that falls within the new 39.6 percent tax bracket.
For those who are married filing jointly with a modified adjusted gross income of $250,000 ($200,000 filing single or $125,000 married filing separately) will have an additional 3.8 percent tax applied to net investment income. Most farms do not normally have to worry about this but there are some possible scenarios where this may come into effect. Typically, the sale of an asset that is used in a trade or business is not considered net investment income, including farm ground that is being used directly by the producer. But if a producer were to retire and lease their farm ground out and the land owner is no longer filing a Schedule F (Form 1040) and sells the land, the income would be considered derived from an investment since it was no longer being used in a trade or business by the property owner.
If you have questions about your specific situation, Michigan State University Extension recommends to always make sure you contact your tax and or legal advisor.