Is the Sale of Farm Land Capital Gain or Ordinary Income?

The livestock and the house are assets separate from the land itself.

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When you sell farmland, any profit you make on the sale is a capital gain. You pay capital gains tax rather than ordinary income tax on the sale, which usually works out the same or better for your bottom line. If you lose money on the sale, then you can write it off as a capital loss. In some cases, though, the tax picture gets more complicated.

Long or Short

Capital gains come in two types, long- and short-term. If you've owned the property for more than one year, you can claim the long-term rate, which works out great. The top tax rate is 20 percent, and as of 2013, married couples filing jointly pay no capital gains tax if their income is $72,500 or less. Short-term capital gains are taxed at the same tax rate as your ordinary income.

Selling the Farm

If you're selling off the entire farm -- equipment, animals, farmhouse -- you can't treat all of it as one capital asset. If, say, you've had the farm for five years, put up a fence eight months ago and bought the tractor three months back, the farm gets a long-term rate, the fence and the tractor are short-term gains. You will have to figure out how much of the sale price goes to each asset to calculate the individual gains or losses.

Selling the Farmhouse

If the farmhouse is your primary residence, you may not have to pay any tax when you sell it. Federal tax law says if you've lived in your home for two of the five years before the sale, you can exclude up to $250,000 in gain on the sale from tax. If you and your spouse both live there and you file a joint return, you can take up to $500,000. If you sell at a loss, though, you don't get any write-off.

Special Cases

If you sell part of the property, you have to figure out how much of a gain you've made on just that piece. If your original purchase contract says the land is worth $150,000, say, and you sell 10 percent of it, you compare the sale price to $15,000 to see if you have a gain. If you sell in installments -- five 20 percent annual installments, for example -- you report 20 percent of your total profit as gain each year.

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About the Author

A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.

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