Key considerations when buying or selling farmland
As a farmer, buying or selling farmland is an important decision, one that will have a significant impact on farming operations and economic success. Your key to success is one that positions you well toward reducing future tax liabilities and improving your financial outcome. An advisor can help you map out an optimal business structure.
When buying or selling farmland, prior to meeting with an advisor, consider the following questions:
IF THE SALE IS PART OF A RETIREMENT PLAN, HAVE YOU CONSIDERED ALL YOUR OPTIONS?
As you approach retirement, ask yourself if selling is the most advantageous action for your cash flow and retirement needs. Where no succession plan exists, we sometimes see farmers selling farmland as part of a retirement plan. Certainly, such a sale creates extra cash flow that can fund retirement; however, renting the land may be equally feasible. If a farmer decides to rent the farmland and use the rental income for living expenses in retirement, this may beget more after-tax revenue when compared to investing the money from the sale once taxes have been paid. However, if you are renting out the land for a longer duration, bear in mind this may affect the use of the capital gains exemption.
DO YOU UNDERSTAND THE TAX IMPLICATIONS AND TAX STRATEGIES THAT CAN MINIMIZE THE TAX BURDEN?
Before selling farmland, there are a few tax-related items to ascertain. First, is the property in question qualified farm property eligible for the capital gains exemption? Only individual taxpayers can apply the exemption on the proceeds from the sale of the sole asset. In addition, if the land is held personally, keep in mind that both the Old Age Security (OAS) clawback and alternative minimum tax (AMT) may be triggered on the sale. Plan appropriately.
WHO WILL BE PAYING THE TAXES?
Different tax implications apply depending on who has title and beneficial ownership. Depending on who purchases the farmland, title is delegated to a partnership, an individual or a corporation. In our experience, some farmers who hold land as a personal asset and add their spouse on the title believe that he or she is then responsible for half of the tax burden and that the spouse’s capital gains exemption can be applied to mitigate taxes. However, without beneficial ownership, the farmer may be unable to split or decrease the tax bill with their spouse, which leads to ambiguity regarding who is actually selling the property. Is it the one spouse, the corporation or is it held jointly? Make sure you know the answers to these questions before you sell.
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Source: RSM Canada LLP
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The information contained herein is general in nature and based on authorities that are subject to change. RSM Canada LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM Canada LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.