Relating to the exclusion from the individual income tax of certain net capital gains from the sale of real property used in a business, and including applicability provisions

This bill requires that for purposes of determining material participation of a taxpayer for the capital gain tax exemption with regard to a partnership, S corporation, limited liability, estate, or trust whose capital gain flows through to the owners or beneficiaries for federal income tax purposes, material participation shall be determined at the owner or beneficiary level according to the activities of each owner or beneficiary. The bill also provides an exception to this material participation requirement for the sale of real property used in a business or rental arrangement which, under certain circumstances, attributes the material participation of certain representatives of an estate or trust to the beneficiaries or owners of that estate or trust. For purposes of determining material participation of a taxpayer with regard to the sale of an estate’s or trust’s real property used in a business or rental arrangement, all the beneficiaries or owners of the estate or trust shall be treated as materially participating in a business or rental arrangement for any year if an executor or trustee of the estate or trust is materially participating in the estate’s or trust’s business or, if the real property is leased to another person, the executor or trustee is materially participating in the lessee’s business that uses the real property.7(21)(a)(1) can be satisfied by any combination of years of material participation attributable to decedent, settlor, or one or more executors or trustees, aggregated over the years preceding the sale. Division I applies to tax years beginning on or after January 1, 2020. DIVISION II —— CAPITAL GAINS TAXATION —— MATERIAL PARTICIPATION —— FUTURE INCOME TAX CHANGES. The bill amends 2018 Iowa Acts, chapter 1161, section 113, to align future income tax changes with the changes in Division I of the bill. By operation of law, the changes in Division II will 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.