This guest post was originally posted on National Land Realty's blog.
Disclaimer: This article is not intended to be construed as professional tax advice, always consult with your tax or financial advisor for additional information on how this will impact your personal or business tax situation.
As Margaret Mitchell wrote in Gone With The Wind: “Death, taxes, and childbirth! There’s never any convenient time for any of them.” Land experts know how draining taxes can be.
The taxes associated with land sales are complex, and as soon as you feel like you’ve got a good grip on them, tax laws change! Even with the many changes that happen, there are some things that are set in stone. In this article, we take a look at the backbone of land taxes.
1031s Are Your Best Friend
Instead of paying taxes on the sale, 1031 exchanges let you invest the proceeds of your sale into a like-kind property. You can defer paying federal and state capital gains taxes.
If you’ve sold land before, you are probably familiar with using 1031s for land sales. But did you know that you can also sell conservation easements, water rights, development rights, and more while deferring taxes as well? This can save you hundreds or even thousands in tax dollars.
Although 1031s are an amazing resource for land buyers, there are strict rules about which properties do and do not qualify for this program. Be sure to check with a local land expert to see if your property qualifies before selling. You can also get started by reading through some official guidelines from the IRS.
Unique Tax Rules For Different Kinds of Land
Different land types come with different benefits and drawbacks.
- Timberland: Each state taxes timber differently. For example, in Texas, timberland property is taxed by the appraised value multiplied by the tax rate. In Massachusetts, the tax is five percent of fair cash value, plus an enrollment fee and eight percent yield tax. To check your state’s unique rules, check out this handy website.
- Vineyards: Small-time vineyard owners could be entitled to a sweet tax credit for making American wine. This Title 27 credit applies to producers who make under 250,000 gallons of wine a year in America. You can get up to a nine percent tax deduction. Bottoms up!
- Agriculture: The most recent tax bill made many changes favorable for agriculture. Starting in the 2018 tax year, farmers can immediately write off up to one million dollars of capital purchases such as breeding livestock, farm equipment, and single-purpose structures.
Capital Gains Tax
A capital gain is defined as a profit from the sale of property or of an investment. This gain is taxable at the state level and the federal level.
This is where capital gains gets tricky. Each state has its own rules. In states like Texas or Nevada, you can expect to pay around twenty-five percent. In California or New York, you can expect to pay upwards of 30 percent! Here’s a tool from SmartAsset that can help you get a rough estimate of what you can expect to pay.
No one enjoys paying taxes. But having a solid sense of the fundamentals of land taxes can help you save your hard-earned money and make you (and your clients!) the most profitable deal possible. 1031 Exchanges are such a dense topic that we can’t possibly cover all there is to know in this article. If you’re a land pro and you’d like to learn more about helping your clients take advantage of 1031s, check out RLI’s November VILT-online course: Tax Deferred 1031 Exchanges. If you’re a landowner looking to learn more about how your property can benefit from these, make sure to contact a land expert near you to learn more.
About the Author: Laura Barker is the Membership and Communications Specialist for the REALTORS® Land Institute. She graduated from Clark University in May 2017 and has been with RLI since October 2017.