alternatives for transferring farm assetsp. 1
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Tax Considerations of Farm Transfers Philip E. Harris Center for Dairy Profitability Department of Agricultural and Applied Economics University of Wisconsin-Madison/Extension. Alternatives for transferring farm assetsp. 1. Sale Gift Transfer at death Trade Transferring to a business entity. - PowerPoint PPT PresentationTRANSCRIPT
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Tax Considerations of Farm Transfers
Philip E. HarrisCenter for Dairy Profitability
Department of Agricultural and Applied EconomicsUniversity of Wisconsin-Madison/Extension
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Alternatives for transferring farm assets p. 1Alternatives for transferring farm assets p. 1
1. Sale2. Gift3. Transfer at death4. Trade5. Transferring to a business
entity
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Taxes imposed on farmersp. 1
Taxes imposed on farmersp. 1
1. Property taxes2. Sales taxes3. Employment taxes4. Self-employment tax5. Income taxes6. Gift taxes7. Death taxes
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Sale p. 1Sale p. 1
• No gift or death tax consequences
• But there are income tax and self-employment tax consequences
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Example 1: Land p. 1Example 1: Land p. 1
Sale Price $295,000
Basis 11,800
Gain $283,200
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Example 2: Cowspp. 1-2Example 2: Cowspp. 1-2
Sale price of cows $130,000
Income tax basis 0
Gain $130,000
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Example 3: Machinery p. 2Example 3: Machinery p. 2
Sale price $58,934
Basis - 8,434
Gain $ 50,500
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Character of gain or lossp. 2
Character of gain or lossp. 2
• Ordinary income (10% - 39.6%)
• Capital gain (0% - 28%)
• Self-employment income (15.3%)
(13.3% for 2011 and 2012)
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Example 4 p. 2Example 4 p. 2
Gwen’s wages $100,000
Dale’s SE income $175,000
Wage base $113,700
SS tax rate 12.4%
SS tax $ 14,099
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Example 4 p. 3Example 4 p. 3
SE income $175,000
Medicare rate × 2.9% $ 5,075
SE income $175,000
Threshold – 150,000
Excess $ 25,000
Addtnl rate x 0.9% 225
Total Medicare tax $5,300
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Three categories p. 3Three categories p. 3
1. Subject to ordinary tax rates and to self-employment tax
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Example 5 p. 3Example 5 p. 3
• Gain from calves is subject to income tax and SE tax
• Gain from sale of heifers and cows is not in this category
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Three categories p. 3Three categories p. 3
1. Subject to ordinary tax rates and to self-employment tax
2. Subject to ordinary income tax rates but not SE taxa. Depreciation recaptureb. Young breeding stock
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Example 6 p. 3Example 6 p. 3
All of the gain on the sale
of the machinery
is treated as ordinary income
because it was all a result
of depreciation
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Example 7 p. 4Example 7 p. 4
Heifers that are younger than 24 months fall into this category
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Three categories pp. 3-4Three categories pp. 3-4
1. Subject to ordinary tax rates and to self-employment tax
2. Subject to ordinary income tax rates but not SE tax
3. Capital gain or ordinary loss
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Example 8 p. 4Example 8 p. 4
Gain on house $ 120,000
Loss on shed - 2,000
Loss on barn - 5,000
Gain on land 48,000
Net gain $ 161,000
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Example 8 p. 4Example 8 p. 4
Gain on house $ 0
Loss on shed - 2,000
Loss on barn - 5,000
Gain on land 5,000
Net loss $ - 2,000
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Net investment income taxpp. 4-5
Net investment income taxpp. 4-5
Beginning in 2013 there is a 3.8% tax
on net investment income
but only if AGI > $200,000
($250,000 MFJ; $125,000 MFS)
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Example 9 pp. 4-5Example 9 pp. 4-5
AGI without sale $50,000
Net investment income $5,000
Gain from sale $161,000
AGI with sale $211,000
Threshold 200,000
Excess $ 11,000
Net inv. inc. tax ($5,000 x 3.8%) $190
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Installment sale p. 5Installment sale p. 5
Gain is reported as payments are received
Example 10: $28,320 of gain
in each of 10 years
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Transfer by Gift p. 5Transfer by Gift p. 5
• Gift tax consequences
• Income tax consequences
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Federal Gift Tax pp. 5-6Federal Gift Tax pp. 5-6
• Annual exclusion: $14,000/year
• Marital deduction: unlimited
• Lifetime exclusion:
2002 - 2010: $1,000,000
2011: $5,000,000
After 2011: $5,000,000 (indexed)
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Example 14 p. 6Example 14 p. 6
Value of gifts $ 575,000Annual exclusion - 26,000Taxable gift $ 549,000Gift tax $ 173,930Applicable credit - 1,730,800Gift tax due $ 0
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Federal and Wisconsin Income Tax pp. 6-7Federal and Wisconsin Income Tax pp. 6-7
Generally, donor’s income tax basis is carried over to donee.
• Exceptions:
– FMV < Donor’s basis
– Gift taxes due
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Example 15 p. 7Example 15 p. 7
Value of land
$295,000
Carryover basis
$ 11,800
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Transfer at Death p. 7Transfer at Death p. 7
• Estate tax consequences
• Income tax consequences
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Federal estate tax p. 7Federal estate tax p. 7
Years Exclusion2006-2008 $2,000,0002009 $3,500,0002010-2011 $5,000,000After 2011 $5,000,000
(indexed)
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Example 16 p. 7Example 16 p. 7
Value of estate $4,439,500Lifetime gifts 549,000Total $5,014,550Tax on $ 5,014,550 $1,735,893Applicable credit - 1,730,800Federal estate tax $ 5,893
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Marital Deduction p. 7Marital Deduction p. 7
Any amount passing to
surviving spouse is deducted from the taxable estate.
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Wisconsin Estate Tax p. 8Wisconsin Estate Tax p. 8
Wisconsin estate tax expired
at the end of 2007.
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Federal and Wisconsin Income Tax p. 8Federal and Wisconsin Income Tax p. 8
• Assets passing at death receive an income tax basis equal to the date-of-death value.
• Both halves of marital property get a date-of-death value basis.
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Federal and Wisconsin Income Tax p. 8Federal and Wisconsin Income Tax p. 8
For deaths in 2010, if the executor elected out of the estate tax, assets get a carry-over basis.
– But, by election,
• $1,300,000 is added
• $3,000,000 is added
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Example 18 p. 8Example 18 p. 8
Asset Dale’s Gwen’s AfterFeed 0 0 23,550Cattle 7,000 7,000 188,400Mach. 8,434 8,434 117,868House 37,500 37,500 175,000Land 60,000 60,000 750,000Total 112,934 112,934 1,254,818
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Trade p. 9Trade p. 9
If farm assets are traded for
“like-kind” assets,
gain or loss is rolled over
into the acquired property.
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Example 20 p. 9Example 20 p. 9
Trade-in value $25,000
Basis in tractor - 2,000
Realized gain $23,000
Boot $15,000
Basis in planter $17,000
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Transferring to aBusiness Entity p. 10Transferring to aBusiness Entity p. 10
Assets can be exchanged for ownership in an entity without triggering recognition of gain
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Example 24 p. 10Example 24 p. 10
• Grandpa owns 42% of LLC
• Dale owns 58% of LLC
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Example 26 p. 11Example 26 p. 11
Sale price of 20% $ 73,100
Grandpa’s basis 0
Grandpa’s gain $ 73,100
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Example 27 p. 11Example 27 p. 11
Value of 20% interest $ 73,100
Annual exclusion - 28,000
Taxable gift $ 45,100
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Questions?