Information relating to the Iowa capital gain deduction
available for tax years prior to January 1, 2023, can be found in prior
versions of rule 701-302.38 (422). Prior versions
of the Iowa Administrative Code are located here:
www.legis.iowa.gov/law/administrativeRules/agencies.
For tax years beginning on or after January 1, 2023, net capital gains from the
sale of real property used in a farming business and the sale of certain
livestock described in subrules 302.87(5) and 302.87(6) may be excluded in the
computation of net income for qualified individual taxpayers. To exclude
qualifying capital gains, a taxpayer has to meet certain holding period and
material participation requirements, unless otherwise indicated in this
rule.
(1)
Definitions. Unless otherwise indicated in this rule or
required by the context, all words and phrases used in this rule that are
defined under Iowa Code section
422.7(13)
shall have the same meaning as provided to them under that Iowa Code section.
"Disabled individual" means an individual
who is receiving benefits as a result of retirement from employment or
self-employment due to disability. In addition, a person is considered to be a
disabled individual if the individual is determined to be disabled in
accordance with criteria established by the Social Security Administration or
other federal or state governmental agency.
(2)
Material participation.
If the taxpayer has regular, continuous, and substantial involvement in the
operations of a farming business that meets the criteria for material
participation in an activity under Section
469(h) of the Internal
Revenue Code and the federal tax regulations for material participation in
26 CFR Sections
1.469-5 and
1.469-5 T for the applicable
number of years required under Iowa law for the deduction, the taxpayer has met
the material participation requirement. Section
469(h)(3) of the Internal
Revenue Code does not apply when determining material participation for the
purposes of this rule.
a. Work done in
connection with an activity is not participation in the activity if the work is
not of a type that is customarily done by an owner and one of the principal
purposes for the performance of the work is to avoid the disallowance of any
loss or credit from the activity.
b. Work done in an activity by an individual
in the individual's capacity as an investor is not material participation in
the business or activity unless the investor is directly involved in the
day-to-day management or operations of the activity or business. Investor-type
activities include the study and review of financial statements or reports on
operations of the activity, preparing or compiling summaries or analyses of
finances or operations of the activity for the individual's own use, and
monitoring the finances or operations of the activity in a nonmanagerial
capacity.
c. A highly relevant
factor in material participation in a business is how regularly the taxpayer is
present at the place where the principal operations of a business are
conducted. In addition, a taxpayer is likely to have material participation in
a business if the taxpayer performs all functions of the business. The fact
that the taxpayer utilizes employees or contracts for services to perform daily
functions in a business will not prevent the taxpayer from qualifying as
materially participating in the business, but the services will not be
attributed to the taxpayer.
d. In
determining whether a particular taxpayer has material participation in a
business, participation of the taxpayer's spouse in a business must also be
taken into account. Activity done by a taxpayer's spouse is considered activity
done by the taxpayer. The spouse's participation in the business must be taken
into account even if the spouse does not file a joint state return with the
taxpayer or if the spouse has no ownership interest in the business. The
activities of other family members, employees, independent contractors,
vendors, laborers, or consultants are not attributed to the taxpayer to
determine material participation.
e. Generally, an individual will be
considered as materially participating in a tax year if the taxpayer satisfies
or meets any of the following tests:
(1) The
individual participates in the farming business for more than 500 hours in the
taxable year.
(2) The individual's
participation in the farming business constitutes substantially all of the
participation of all individuals in the business (including individuals who are
not owners of interests in the business) for the tax year.
EXAMPLE: Taxpayer A is a teacher in a small town in southeast
Iowa. Taxpayer A owns 20 acres of farmland. Taxpayer A grows various crops on
this land and is the only one who works on the farm. In the summer of 2023,
there was a drought killing most of Taxpayer A's crops so Taxpayer A spent only
80 hours in 2023 growing crops. Taxpayer A is deemed to have materially
participated in the farming business in 2023.
(3) The individual participates in the
farming business for more than 100 hours in the tax year, and no other
individual (including individuals who are not owners of interests in the
business) participates more in the business than the taxpayer during the tax
year.
(4) The individual
participates in two or more businesses, excluding rental businesses, in the tax
year and participates for more than 500 hours in all of the businesses and more
than 100 hours in each of the businesses, and the participation is not material
participation within the meaning of one of the tests in subparagraphs
302.87(2)
"e"(1) through (3), (5) and (6).
EXAMPLE: Taxpayer B is a full-time CPA. Taxpayer B owns a
restaurant and a farm. In 2023, Taxpayer B spent 400 hours working on the farm
and 150 hours at the restaurant, and other individuals spent more time in the
business activity than Taxpayer B did. Taxpayer B is treated as a material
participant in each of the businesses in 2023.
(5) The individual materially participated
(determined without regard to this subparagraph) in a farming business for five
of the ten years preceding the applicable tax year.
EXAMPLE: Taxpayer C is the co-owner of a farming business.
Taxpayer C stopped farming in 2018 after 15 years of farming. Since Taxpayer C
stopped farming, Taxpayer C has retained interest in the farming business.
Taxpayer C is considered to be materially participating in the business in
2019, 2020, 2021, 2022, and 2023 because Taxpayer C materially participated in
the farming business during five of the ten years immediately preceding 2019,
2020, 2021, 2022, and 2023.
(6) The individual participates in the
business activity for more than 100 hours and, based on all the facts and
circumstances, the individual participates on a regular, continuous, and
substantial basis. Management activities of a taxpayer are not considered for
purposes of determining if there was material participation if either of the
following applies: any person other than the taxpayer is compensated for
management services or any person provides more hours of management services
than the taxpayer.
f.
The following paragraphs provide additional information regarding material
participation:
(1) Limited partners of a
limited partnership. The limited partners will not be treated as materially
participating in any activity of a limited partnership except in a situation
where the limited partner would be treated as materially participating under
the material participation tests in subparagraphs 302.87(2)"e"
(1) or 302.87(2)"e"(5) above if the taxpayer were not a
limited partner for the tax year.
(2) Cash farm lease. A taxpayer who rents out
farmland on a cash basis is not materially participating in a farming business.
The burden is on the taxpayer to show that the taxpayer materially participated
in the farming business operated on the cash-rented farmland.
(3) Farmer landlord involved in crop-share
arrangement. A farmer landlord is subject to self-employment tax on net income
from a crop-share arrangement with a tenant. The landlord is considered to be
materially participating with the tenant in the crop-share activity if the
landlord satisfies one of the four following tests:
Test 1: The landlord does any three of the following:
(1) pays or is obligated to pay for at least
half the direct costs of producing the crop;
(2) furnishes at least half the tools,
equipment, and livestock used in producing the crop;
(3) consults with the tenant; and
(4) inspects the production activities
periodically.
Test 2: The landlord regularly and frequently makes, or takes
part in making, management decisions substantially contributing to or affecting
the success of the enterprise.
Test 3: The landlord worked 100 hours or more spread over a
period of five weeks or more in activities connected with crop
production.
Test 4: The landlord has done tasks or performed duties
which, considered in their total effect, show that the landlord was materially
and significantly involved in the production of the farm
commodities.
(4)
Conservation reserve program (CRP). Activities conducted under the CRP do not
fall within the definition of "farming business" under Iowa Code section
422.7. If a taxpayer's only
activity is managing CRP land, the taxpayer does not meet the material
participation requirement. A taxpayer may still meet the material participation
requirement if the taxpayer materially participates in a farming business
through a different activity.
(5)
Recordkeeping requirements. Taxpayers are required to provide proof of services
performed and the hours attributable to those services. Detailed records should
be maintained by the taxpayer, on as close to a daily basis as possible at or
near the time of the performance of the activity, to verify that the material
participation test has been met. However, material participation can be
established by any other reasonable means, such as approximating the number of
hours based on appointment books, calendars, or narrative summaries. Records
prepared long after the activity, in preparation of an audit or proceeding, are
insufficient to establish participation in an activity.
(3)
Lifetime
election. A retired farmer may make a single lifetime election on a
form prescribed by the department to exclude all qualifying capital gains from
the sale of real property used in a farming business and the sale of certain
livestock described in subrules 302.87(5) and 302.87(6). If a retired farmer
makes the election described in this subrule, the retired farmer is not
eligible to make the election to exclude the net income received pursuant to a
farm tenancy agreement covering real property under Iowa Code section
422.7(14) and
rule
701-302.88 (422) or claim the
beginning farmer tax credit under Iowa Code section
422.11E in the same tax year or
any subsequent tax year. The election is irrevocable once made.
a.
Beginning farmer tax
credit. A retired farmer shall not utilize an unclaimed amount of a
beginning farmer tax credit in the same tax year they are making an election
described in this subrule or in subrule 302.88(3) or in any subsequent tax
year.
b.
Surviving
spouses. A surviving spouse of a deceased retired farmer may be
eligible to make the election described in this subrule or the election
described in subrule 302.88(3) or exclude the qualifying income pursuant to the
election made by the retired farmer prior to death.
(1) A surviving spouse of a deceased retired
farmer may make the election described in this subrule or the election
described in subrule 302.88(3) on behalf of the deceased retired farmer that
the retired farmer would have been eligible to make prior to death. A surviving
spouse may only make an election on behalf of the deceased retired farmer by
the due date of the tax return, including extensions, for the tax year
immediately following the tax year of the retired farmer's death.
EXAMPLE 1: Farmer A, a retired farmer, owned real property
used in a farming business, Plot 1. Farmer A was married to Spouse B. Farmer A
sold Plot 1 which generated a capital gain. Farmer A died later that tax year.
Farmer A qualified to make an election to exclude qualifying capital gains from
the calculation of net income prior to death but did not make an election
before death. Spouse B can make an election on behalf of Farmer A on the final
tax return.
(2) If a
retired farmer made the election described in this subrule or the election
described in subrule 302.88(3) prior to death, the surviving spouse of the
deceased retired farmer may exclude the qualifying income pursuant to the
election made by the retired farmer prior to death. A surviving spouse cannot
change the election the deceased retired farmer made. Any election made by the
retired farmer prior to death is binding on all real property used in a farming
business owned by the retired farmer at the time of death. This election is
only binding on the retired farmer and the surviving spouse.
EXAMPLE 2: Farmer C, a retired farmer, owned real property
used in a farming business, Plot 2. Farmer C was married to Spouse D. Farmer C
met the material participation and holding period requirements. Farmer C made
the election to exclude net income from a farm tenancy agreement described in
subrule 302.88(3) from Plot 2. Farmer C then died. Spouse D inherited Plot 2
from Farmer C. Spouse D does not qualify to make an election. Spouse D may
exclude net income from a farm tenancy agreement from Plot 2 pursuant to the
election Farmer C made before death. Spouse D cannot exclude qualifying capital
gains with regard to Plot 2 or claim the beginning farmer tax credit.
EXAMPLE 3: Assume the same facts as Example 2 but Spouse D
does qualify to make an election independent of Farmer C. Spouse D still cannot
exclude qualifying capital gains from Plot 2 or claim the beginning farmer tax
credit unless Spouse D disclaims Farmer C's election and makes an election as
described in subparagraph 3.
EXAMPLE 4: Farmer E, a retired farmer, owned real property
used in a farming business, Plot 3, Plot 4, and Plot 5. Farmer E was married to
Spouse F. Farmer E met the holding period and material participation
requirements. Farmer E sold Plot 3, which generated a capital gain. Farmer E
made an election to exclude the capital gain. Farmer E then died. Spouse F
inherited Plot 4 and Plot 5 from Farmer E. Plot 4 and Plot 5 are bound by the
election Farmer E made before death. Spouse F is eligible to exclude the
capital gain from the sale of Plot 4 and Plot 5 pursuant to the election Farmer
E made. Spouse F cannot exclude net income from a farm tenancy agreement from
Plot 4 or Plot 5 or claim the beginning farmer tax credit.
EXAMPLE 5: Farmer G, a retired farmer, owned real property
used in a farming business, Plot 6 and Plot 7. Farmer G was married to Spouse
H. Farmer G met the holding period and the material participation requirements.
Farmer G made the election to exclude net income from a farm tenancy agreement
described in subrule 302.88(3) from Plot 6 and Plot 7. Farmer G then died.
Spouse H inherited Plot 6 and Plot 7. Spouse H is bound by the election made by
Farmer G on Plot 6 and Plot 7 and may exclude the net income from a farm
tenancy agreement for those plots. Spouse H gets remarried to a new spouse,
Spouse J. Spouse H then dies. Spouse J inherits Plot 6 and Plot 7 from Spouse
H. Spouse J is not a surviving spouse of a retired farmer and is not bound by
the election Farmer G originally made on Plot 6 and Plot 7. Spouse J may make
an election described in this subrule or described in subrule 302.88(3) on Plot
6 and Plot 7 if Spouse J meets the eligibility criteria.
(3) A surviving spouse of a deceased retired
farmer may disclaim the election made by the retired farmer. If a surviving
spouse of a deceased retired farmer makes this disclaimer, the surviving spouse
is not eligible to deduct qualifying income pursuant to an election made by the
retired farmer prior to death. A surviving spouse of a deceased retired farmer
shall make this disclaimer on a form prescribed by the department and file the
form with the surviving spouse's income tax return. A surviving spouse must
make the disclaimer by the due date of the tax return, including extensions,
for the tax year immediately following the tax year of the retired farmer's
death. If the surviving spouse excluded income on the surviving spouse's return
for the tax year of the retired farmer's death pursuant to the election the
retired farmer made and wants to disclaim the election, then the surviving
spouse must amend the surviving spouse's return to include that income in Iowa
net income and adjust tax liability accordingly. If no disclaimer is made by
the due date, including extensions, of the surviving spouse's income tax return
for the tax year immediately following the tax year of the retired farmer's
death, then the surviving spouse is no longer eligible to make a disclaimer and
is bound by the election the retired farmer made. The disclaimer is irrevocable
once made. Once a disclaimer has been made, a surviving spouse may make a
single lifetime election that would also apply to the land previously bound by
the deceased retired farmer's election if the surviving spouse meets the
definition of a retired farmer. A surviving spouse may make a single lifetime
election that would apply to land not bound by the deceased retired farmer's
election if the surviving spouse meets the eligibility criteria.
EXAMPLE 6: Farmer K, a retired farmer, owned real property
used in a farming business, Plot 8. Farmer K was married to Spouse L. Farmer K
met the holding period and the material participation requirements. Farmer K
made the election to exclude net income from a farm tenancy agreement described
in subrule 302.88(3) from Plot 8. Farmer K then died. Spouse L inherited Plot 8
from Farmer K. Spouse L independently qualifies as a retired farmer to make an
election described in this subrule or the election described in subrule
302.88(3). Spouse L may exclude net income from a farm tenancy agreement from
Plot 8 pursuant to the election Farmer K made before death, or Spouse L may
disclaim that election and make Spouse L's own election to exclude capital
gains from Plot 8.
EXAMPLE 7: Assume the same facts as Example 6 except Spouse L
does not independently qualify as a retired farmer to make an election
described in this subrule or the election described in subrule 302.88(3).
Spouse L may exclude net income from a farm tenancy agreement from Plot 8
pursuant to the election Farmer K made before death, or Spouse L may disclaim
that election and not exclude income because Spouse L does not qualify to make
an election as a retired farmer.
c.
Joint owners. A retired
farmer may exclude income pursuant to the election described in this subrule or
the election described in subrule 302.88(3) to the extent of the retired
farmer's ownership interest in the real property.
(1) A retired farmer who owns real property
used in a farming business jointly with a spouse and makes the election
described in this subrule or the election described in subrule 302.88(3) may
only exclude qualifying income from that real property to the extent of the
retired farmer's ownership interest held in that real property. The retired
farmer's ownership interest does not include the ownership interest of the
retired farmer's spouse. If each spouse qualifies as a retired farmer, each
spouse may make different elections on the property they jointly own to the
extent of their respective ownership interests. There is a rebuttable
presumption that spouses who jointly own real property used in a farming
business each have a 50 percent ownership interest in the real property. This
can be rebutted with documentation proving a different ownership percentage.
EXAMPLE 8: Farmer M and Farmer N, both retired farmers, are
married and own Plot 9 jointly. They each have a 50 percent ownership interest
in Plot 9. They both qualify to make the election to exclude qualifying capital
gains or net income from a farm tenancy agreement. They file jointly for Iowa
tax purposes. In 2023, Farmer M and Farmer N receive $50,000 total in net
income from a farm tenancy agreement covering Plot 9. Farmer M makes the
election to exclude net income from a farm tenancy agreement. Farmer N does not
make an election. Farmer M is eligible to exclude $25,000, 50 percent of the
net income from Plot 9, from net income. Farmer N must include $25,000, 50
percent of the net income from the farm tenancy agreement, in net income.
Farmer N is still eligible to make an election to exclude qualifying capital
gains or net income from a farm tenancy agreement in a subsequent tax
year.
EXAMPLE 9: Assume the same facts as Example 8 except Farmer N
makes the same election to exclude net income from a farm tenancy agreement. On
the jointly filed return, Farmer M and Farmer N can exclude from net income
$50,000, 100 percent of the net income from a farm tenancy agreement.
EXAMPLE 10: Assume the same facts as Example 8 except Farmer
N does not qualify to make an election to exclude qualifying capital gains or
net income from a farm tenancy agreement. Farmer M can exclude from net income
$25,000, 50 percent of the net income received from a farm tenancy agreement on
Plot 9. Farmer N must include in net income $25,000, 50 percent of the net
income from the farm tenancy agreement on Plot 9.
(2) A retired farmer who owns real property
used in a farming business jointly with someone who is not the retired farmer's
spouse may only exclude qualifying income from that real property to the extent
of the retired farmer's ownership interest held in the real property.
EXAMPLE 11: Farmer O, a retired farmer, owns Plot 10 jointly
with Farmer P. Farmer O and Farmer P are not taxed as a partnership. Farmer O
has a 60 percent ownership interest in Plot 10, while Farmer P has a 40 percent
ownership interest. Farmer O qualifies to make an election to exclude
qualifying capital gains or net income from a farm tenancy agreement. Farmer P
does not. Farmer O and Farmer P sell Plot 10 for a capital gain of $100,000.
Farmer O elects to exclude the capital gain. Farmer O may exclude from net
income $60,000, 60 percent of the capital gain. Farmer P is required to include
$40,000 in net income, 40 percent of the capital gain.
(4)
Net capital
gains from the sale of real property used in a farming business. Net
capital gains from the sale of real property used in a farming business may be
excluded from the owner's Iowa net income if the owner held the real property
used in a farming business for ten or more years and materially participated in
a farming business for at least ten years. If the taxpayer is a retired farmer,
the taxpayer must make the election described in subrule 302.87(3) to exclude
qualifying capital gains. It is not required that the property be located in
Iowa for the owner to qualify for the deduction.
a. Material participation means the same as
"materially participated" as defined in Iowa Code section
422.7(13) and
described in detail in subrule 302.87(2). If the taxpayer is a retired farmer
and materially participated in a farming business for ten or more years in the
aggregate, then the taxpayer will meet the material participation requirements.
If the taxpayer is not a retired farmer, the taxpayer must have materially
participated in a farming business for the ten years immediately preceding the
sale. When determining whether a taxpayer is no longer materially participating
to meet the definition of a retired farmer, the material participation test in
subparagraph 302.87(2)"e"(5) shall not apply and the
participation of the spouse of the taxpayer does not count as participation by
the taxpayer.
b. If the taxpayer
has held the real property used in a farming business and sells the property to
a relative of the taxpayer, the net capital gain from the sale may be excluded
from net income regardless of whether the taxpayer met the material
participation or holding period requirements.
c. In situations in which real property was
sold by a partnership, S corporation, limited liability company, estate, or
trust and the capital gain from the sale of the real property flows through to
the owners of the business entity for federal income tax purposes, the owners
may exclude the capital gain from their net incomes if the real property was
held for ten or more years and the owners had materially participated in a
farming business for ten years prior to the date of sale of the real property,
or ten years in the aggregate if the owner is a retired farmer.
d. Installments received in the tax year from
installment sales of real property used in a farming business are eligible for
the exclusion of capital gains from net income if all relevant criteria were
met at the time of the installment sale.
EXAMPLE: A taxpayer received an installment payment in 2025
from the sale of real property used in a farming business that occurred in
2023. The installment received in 2025 would qualify for the exclusion if the
taxpayer had held the real property for a minimum of ten years and had
materially participated in a farming business for a minimum of ten years at the
time of the sale in 2023.
e.
Capital gains from the sale of real property by a C corporation do not qualify
for the capital gain deduction.
f.
The following noninclusive examples illustrate how this subrule applies:
EXAMPLE 1: S corporation, X, owned 1,000 acres of farmland.
Taxpayer A is the sole shareholder of X and had materially participated in X
for more than ten years at the time that X sold 500 acres of the farmland for a
capital gain of $100,000. X owned the farmland for more than ten years at the
time of the sale. The capital gain recognized by X that passed through to
Taxpayer A as the shareholder of X can be excluded from Iowa net income because
Taxpayer A met the material participation and holding period
requirements.
EXAMPLE 2: Taxpayer B and Taxpayer C are brothers who both
owned 50 percent of the stock in an S corporation, Y, that owned 1,000 acres of
farmland. Taxpayer B managed all the farming operations for Y from the time Y
was formed in 2010. Taxpayer C did not participate in the farming operations. Y
sold 200 acres of the farmland to another brother, Taxpayer D, for a $50,000
gain. $25,000 of the capital gain passed through to Taxpayer B, and $25,000 of
the capital gain passed through to Taxpayer C. Both Taxpayer B and Taxpayer C
had owned the corporation for at least ten years at the time the land was sold,
but only Taxpayer B had materially participated in the corporation for at least
ten years. Taxpayer B may exclude the $25,000 capital gain from the land sale
because he met the time held and material participation requirements. Taxpayer
C may exclude the $25,000 capital gain because the land was sold to a relative
of Taxpayer C.
EXAMPLE 3: Taxpayer E owned and materially participated in a
farming business for 15 years and raised row crops. There were 500 acres of
land in the farming business, 300 acres had been held for 15 years, and 200
acres had been held for five years. Taxpayer E sold the 500 acres of land.
Taxpayer E cannot exclude the capital gain from the sale of the 200 acres that
had only been held for five years. Taxpayer E may exclude the capital gain from
the sale of the 300 acres of land that had been held for 15 years.
EXAMPLE 4: Taxpayer F owned and materially participated in a
farming business for more than ten years. In this business, Taxpayer F farmed a
neighbor's land on a crop-share basis throughout the period. Taxpayer F bought
80 acres of land and farmed that land for six years until Taxpayer F sold the
land for a capital gain of $20,000. Taxpayer F cannot exclude the capital gain
because the farmland had been held for less than ten years even though Taxpayer
F materially participated in a farming business for more than ten years.
EXAMPLE 5: Taxpayer G and Taxpayer H were partners in a
partnership since 2008 that owned 80 acres of farmland. Taxpayer G and Taxpayer
H are both over 55 years old. The land was sold in 2023 when Taxpayer G and
Taxpayer H retired from farming. In all the years Taxpayer G and Taxpayer H
were partners in the partnership, Taxpayer G materially participated in the
farming business. Taxpayer H was a material participant for the years 2008-2013
and 2018-2023. Taxpayer G and Taxpayer H realized a capital gain of $50,000
from the land sale, which was divided equally between them. Taxpayer G was able
to exclude $25,000 of the capital gain that Taxpayer G received from the sale
since Taxpayer G had held the land and materially participated in a farming
business for at least ten years at the time the land was sold. Taxpayer H was
able to exclude $25,000 of the capital gain because, although Taxpayer H had
not materially participated in a farming business for ten consecutive years
when the land was sold, Taxpayer H was a retired farmer and had materially
participated in a farming business for ten years in the aggregate.
EXAMPLE 6: Taxpayer J had a farming business that Taxpayer J
owned and materially participated in for 20 years. There were two tracts of
farmland in the farming business. Taxpayer J sold one tract of farmland in the
farming business that Taxpayer J had held for more than ten years for a $50,000
capital gain. The farmland was sold to a person who was not a relative. During
the same year, Taxpayer J had $30,000 in long-term capital losses from sales of
stock. In this situation, the capital gains would not be applied against the
capital losses. Because the capital losses are unrelated to the farming
business, Taxpayer J does not have to reduce the Iowa capital gain deduction by
the capital losses from the sales of stock.
EXAMPLE 7: Taxpayer K had owned farmland, Plot A, and had
materially participated in a farming business since 2010. In 2018, Taxpayer K
entered into a like-kind exchange under Section
1031 of the Internal Revenue Code for
farmland, Plot B. Taxpayer K continued to materially participate in a farming
business. Plot B was sold in 2023, resulting in a capital gain. Under Section
1223 of the Internal Revenue Code, the
holding period for the capital gain starts in 2010. Taxpayer K held Plot B for
less than ten years, but because Taxpayer K met the ten-year holding period
requirement under Section 1223, the capital gain from the sale qualifies for
the Iowa capital gain deduction.
EXAMPLE 8: Taxpayer L and Taxpayer M, a married couple, owned
farmland in Iowa since 1995. Taxpayer L died in 2010 and, under Taxpayer L's
will, Taxpayer M acquired a life interest in the farm. The farmland was managed
by their child, Taxpayer N, after Taxpayer L's death. Taxpayer N had a
remainder interest. Taxpayer M died in 2018, and Taxpayer N continued to
materially participate and manage the farm operation. Taxpayer N sold the
farmland in 2023 and reported a capital gain. Under Section
1223 of the Internal Revenue Code, the
holding period for the capital gain starts in 2010, when Taxpayer L died.
Because the holding period for the capital gain was ten years or more, and
Taxpayer N met the material participation requirement, Taxpayer N can deduct
the capital gain.
(5)
Net capital gains from the sale
of cattle or horses used for certain purposes and held for 24 months by
taxpayers who are retired farmers. Net capital gains from the sale of
cattle or horses held for 24 months or more for draft, breeding, dairy, or
sporting purposes may be excluded from the taxpayer's Iowa net income if the
taxpayer is a retired farmer and the taxpayer made the election described in
subrule 302.87(3). The retired farmer must have materially participated in the
farming business in which the cattle or horses were held for five of the eight
years preceding the retired farmer's retirement or disability and must have
sold all or substantially all of the retired farmer's interest in the farming
business by the time the election is made. For purposes of this subrule and
subrule 302.87(6), "substantially all" means 90 percent of the interest in the
farming business.
a. Material participation
means the same as "materially participated" as defined in Iowa Code section
422.7(13) and
described in detail in subrule 302.87(2). When determining whether a taxpayer
is no longer materially participating to meet the definition of a retired
farmer, the material participation test in subparagraph
302.87(2)"e"(5) shall not apply and the participation of the
spouse of the taxpayer does not count as participation by the
taxpayer.
b. Whether cattle or
horses sold by the taxpayer after the taxpayer has held them 24 months or more
were held for draft, breeding, dairy, or sporting purposes may be determined
from federal court cases on such sales and the standards and examples included
in 26 CFR Section
1.1231-2. Proper records should be kept
showing purchase and birth dates of cattle and horses. The absence of records
may make it impossible for the owner to show that the owner held a particular
animal for the necessary holding period. Whether cattle or horses are held for
draft, breeding, dairy, or sporting purposes depends on all the facts and
circumstances of each case.
c.
Capital gains from sales of qualifying cattle or horses by an S corporation,
partnership, or limited liability company, where the capital gains flow through
to the owners of the respective business entity for federal income tax
purposes, qualify for the capital gain deduction to the extent the owners
receiving the capital gains are retired farmers who meet all the relevant
criteria.
d. Capital gains from
sales of qualifying cattle or horses by a C corporation are not eligible for
the capital gain deduction.
(6)
Net capital gains from the sale
of breeding livestock, other than cattle or horses, held for 12 or more months
by taxpayers who are retired farmers. Net capital gains from the sale
of breeding livestock, other than cattle or horses, held for 12 or more months
may be excluded from the taxpayer's Iowa net income if the taxpayer is a
retired farmer and the taxpayer made the election described in subrule
302.87(3). The retired farmer must have materially participated in the farming
business in which the breeding livestock, other than cattle or horses, were
held for five of the eight years preceding the retired farmer's retirement or
disability. The retired farmer must have sold all or substantially all of the
retired farmer's interest in the farming business by the time the election is
made.
a. Material participation means the
same as "materially participated" as defined in Iowa Code section
422.7(13) and
described in detail in subrule 302.87(2). When determining whether a taxpayer
is no longer materially participating to meet the definition of a retired
farmer, the material participation test in subparagraph
302.87(2)"e"(5) shall not apply and the participation of the
spouse of the taxpayer does not count as participation by the
taxpayer.
b. If livestock other
than cattle or horses is considered to have been held for breeding purposes
under the criteria established in
26 CFR Section
1.1231-2, the livestock will also be deemed
to have been breeding livestock for purposes of this rule. Proper records
should be kept showing purchase and birth dates of breeding livestock. The
absence of records may make it impossible for the owner to show that the owner
held a particular animal for the necessary holding period. Whether livestock
are held for breeding purposes depends on all the facts and circumstances of
each case.
c. Capital gains from
sales of qualifying livestock other than cattle or horses by an S corporation,
partnership, or limited liability company, where the capital gains flow through
to the owners of the respective business entity for federal income tax
purposes, qualify for the capital gain deduction to the extent the owners
receiving the capital gains are retired farmers who meet all the relevant
criteria.
d. Capital gains from the
sale of breeding livestock other than cattle or horses by a C corporation are
not eligible for the capital gain deduction.
(7)
Installments from sales
consummated before January 1, 2023. Installments from sales that were
consummated before January 1, 2023, that result in net capital gains qualify
for the capital gain deduction if the requirements of Iowa Code section
422.7(21) and
rule
701-302.38 (422), as they
existed prior to January 1, 2023, were met at the time the sale was
consummated.
This rule is intended to implement Iowa Code section
422.7(13).
