Relating to taking a capital gain deduction for the sale of real property used in a farming business

Sponsored by the Senate Ways and Means Committee

Topics:Agriculture Taxes

Same legislation: SF 192, HSB 188, HF 778

Write your legislators about itWhat changed before it passed

Official bill page Lobbyist declarations One-pager to print

Where it is now

Done: IntroducedFebruary 5, 2019
Done: SubcommitteeFebruary 6, 2019
Done: Senate committeeApril 17, 2019
Done: Passes the SenateApril 25, 201949–0
Skipped: House committeeSkipped
Done: Passes the HouseApril 24, 2019
Done: To the GovernorApril 29, 2019
Done: Signed into lawMay 21, 2019

HF 778 became law → The same legislation passed as HF 778, so this version was set aside. Go to HF 778 What’s a funnel?

What’s in it

This bill modifies the capital gain deduction for the sale of real property used in a farming business enacted in 2018 Iowa Acts, chapter 1161, section 113. The capital gain deduction for the sale of real property used in a farming business is set to begin in tax year 2023 or in a later tax year, contingent upon the satisfaction of certain net general fund revenue amount and growth targets. Currently, the capital gain deduction for the sale of real property used in a “farming business” set to go into effect in 2023 or a later tax year restricts the deduction to the sale of “real property used in a farming business”, provided the taxpayer “materially participated” in the farming business for at least years, held the real property for at least years, and sold the real property to a “relative”, all as defined in 2018 Iowa Acts, chapter 1161.

Read the full explanation

The bill modifies the restrictions relating to the deduction for the sale of real property used in farming business by permitting the taxpayer to take the deduction if one of the following apply: the taxpayer “materially participated” in the farming business for at least years and held the real property for at least years; or the taxpayer sold the real property to a “relative”. The bill expands the definition of “relative” to include an entity in which a relative of the taxpayer has a legal or equitable interest in the entity as an owner, member, partner, or beneficiary. The bill also modifies the definitions of “farming business” and “real property used in a farming business”.1, which is used in the definition of farming business. The bill strikes provisions related to restricting the capital gain deduction for the sale of real property used in a farming business if the relative sells or transfers the real property used in a farming business within five years of the original sale.9 (deductions from net income). The bill does not change the future effective date of the capital gain deduction for the sale of real property used in a farming business.

Full bill text · What changed before it passed¹

Fiscal note

Less revenue: up to $227,000 Compare with other bills

AI summary This bill expands the tax exemption for capital gains from the sale of real property used in a farming business. It is estimated to decrease net General Fund revenue by $7.8 million per fiscal year and reduce revenue for schools by $227,000 per year, starting in fiscal year 2024.²

Read the fiscal note

Description

House File 778 modifies the income tax exemption for a qualified capital gain realized through the sale of real property used in a farming business. The change is effective once the contingent individual income tax system established in SF 2417 (2018 Tax Modifications Act) becomes effective. The earliest possible effective tax year (TY) for the contingent system is TY 2023.

The contingent tax system allows a capital gains exemption for the sale of farming business real property if certain sale conditions are met. The current capital gains exemption under the contingent tax system requires all of the following:

That the taxpayer realizing the capital gain has materially participated in the farming business for at least 10 years and has owned the real property for at least 10 years.
That the sale that produced the capital gain was to a qualified relative, where either:
The relationship to the purchaser was the result of a common ancestor (consanguinity, or blood relative), or
The sale was to a lineal descendant (including adopted children).

Current law disallows the exemption if the property is sold by the purchasing relative within five years to a nonqualifying person. The deduction is also disallowed where a net operating loss is deducted on the taxpayer’s tax return for that tax year. Also, all buildings which are primarily used or intended for use as human habitation are excluded from the exemption. The changes in the Bill expand the availability of the capital gains exemption to include additional capital gains situations. Expansions include:

All sales to relatives, as defined in the Bill, result in a capital gain exemption for the seller, without regard to whether the owner materially participated in the farm operation or to the length of time the real property was owned by the taxpayer.
The disallowance of the exemption upon sale within five years to a nonqualifying person is removed.
The disallowance for tax years where a net operating loss is deducted is removed.
A sale to an entity (LLC, corporation, etc.) in which a qualifying purchaser has an interest at the time of the sale qualifies for the exemption.
Sales to affinity (i.e., by marriage) relatives as well as blood relatives qualify for the exemption.
The sale of a building primarily used for human habitation is included in the exemption if the building is located on or adjacent to the farming business property.

Assumptions

Using Iowa income tax returns filed for TY 2017, the Department of Revenue estimates that the changes in the Bill will increase the annual aggregate amount of capital gains exempted from Iowa income tax by $148.0 million.
The contingent income tax system is assumed to be effective the first tax year possible, TY 2023.
The average marginal income tax rate for the impacted tax returns will equal 5.3% in TY 2023 and after.
Qualified farm taxpayers are not required to make estimate payments, and capital gains income is not subject to withholding. Therefore, TY 2023 fiscal impacts will occur when TY 2023 tax returns are filed in spring 2024 (FY 2024).
The average local option income surtax rate for schools will equal 2.9% of State income tax liability.

Fiscal Impact

The expansion of the farming business capital gains exemption currently allowed under the contingent income tax system is projected to decrease net General Fund revenue by $7.8 million per fiscal year. In addition, revenue raised by the local option income surtax for schools will be reduced by $227,000 per year. Both revenue reductions will begin FY 2024.