Ethan Stubbs
Iowa Land Specialist
Avoiding capital gains tax on a land sale may seem complicated, but with some planning, you can certainly reduce it. Here are a few strategies that can help you minimize capital gains tax on the sale of land.
The transfer of farmland ownership can be an emotionally complex and challenging process. Whether you’re a member of a multi-generational farm family or a first-time land investor, understanding how to maximize your ownership from an enjoyment perspective and a tax-savings standpoint is crucial.
As dedicated farmland real estate professionals, we recognize that no two transactions are alike. Our goal is to help you achieve the best sale price and keep as much money as possible when tax time arrives.
Understanding Stepped-Up Basis
(Consult an accountant or attorney for financial guidance—this is for informational purposes only.)
One of the most powerful tools for minimizing taxes on land sales is the stepped-up basis. In simple terms, the tax basis of a property is typically the original purchase price. When land appreciates over decades, selling it can trigger long-term capital gains taxes.
For example, if your grandfather bought a farm in 1965 for $100 per acre, it now sells for $10,000 per acre. The tax authorities would tax him on the $9,900 gain per acre. With large acreage, this quickly adds to a substantial tax burden.
A stepped-up basis allows heirs to reset the property’s tax basis to its fair market value at the time of the owner’s passing. If someone inherits a farm worth $10,000 per acre, they can sell it for that amount. In this case, there is little or no taxable gain. Establishing this new basis typically requires an appraisal or a formal sale.
Families planning their estate should discuss the stepped-up basis strategy early. This can save heirs a lot of money on taxes. Open conversations with family members and professionals are key to making the most informed decisions.
Leveraging a 1031 Exchange to Defer Taxes
If a stepped-up basis is not available, another good tax strategy is the 1031 exchange. This lets landowners avoid capital gains tax. They can achieve this by delaying the taxable event by reinvesting the money in another qualifying property.
To take advantage of a 1031 exchange, you must adhere to strict IRS guidelines:
- Identify a replacement property within 45 days of selling your land.
- Complete the purchase within 180 days from the sale date.
- Use a qualified intermediary to help with the transaction. This third party must hold the proceeds from the sale. The seller should not receive the money directly.
A 1031 exchange is a great way to protect your money and grow your land portfolio. However, it is important to do it correctly. Working with experienced tax professionals ensures compliance and maximizes the benefits of the exchange.
Final Thoughts
Farmland is more than an investment—it’s a legacy. Whether you are selling for financial gain, estate planning, or reinvestment, understanding these tax-saving strategies can be highly beneficial.
If you or someone you know is considering selling a piece of land, I’d be happy to discuss your options. I always recommend consulting with an accountant or lawyer for financial and legal advice. However, I can offer helpful insights. This can help you make informed decisions before those discussions occur.
Feel free to reach out—I’m here to help. Ethan Stubbs land real estate agent.
Do you want to learn more?
If you’re considering buying, selling, or managing land, reach out to a local High Point Land Company Agent. For more questions, visit our YouTube Knowledge Center.
About Ethan Stubbs
Growing up in Northeast Iowa, Ethan grew a passion for chasing whitetail deer and wild turkeys at a young age. Deciding to turn this passion into a career, Ethan traveled all over the world capturing hunts with a camera. Fast forward to today, Ethan has continued his passion outdoors and will continue to work in the outdoor space selling farms in Iowa. If you are interested in selling your farmland, call Ethan at (608) 306-1788 or email him at ethan@highpointlandcompany.com
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