Ask TaxMama ... Selling The Farm ... March 28, 2003

Ask TaxMama.Com
Tax Information With A Mother's Touch

Published by Eva Rosenberg, MBA, EA


	Ten Things You Didn't Tell Your Tax Pro
	Ten Ways To Invite An Audit
	Selling the Farm
	Land Repurchase
	Employed Without A Permit
	Accountant Blew It
	Haven't Filed - No Jail?


	Tax Breaks For Troops
	California to Study Web Sales Tax


	The Funeral

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Selling The Farm

Last week, Virginia from Wirtz, VA asked about selling her mother's farm. (See last week's AskTaxMama

This week, Dean Young gives us some great tips.

<TaxPro Replies>

Dear TaxMama,

I've faced similar mixed personal residence/other use considerations & although both the business side of the property and the personal residence side would both be subject to capital gains rates on any taxable portion of the sale, you have to take into account the fact that:

A) Depreciation recapture could/would apply to the farmhouse sale gain that's used as the rental unit under 1245 &

B) You'd want to maximize (or actually "optimize") the amount of gain/basis/proceeds, etc. that are allocable to the personal residence side of the overall property and the business side/portion.

One way that I've done this in the past has been to have the property LEGALLY SUBDIVIDED BEFORE SALE so that instead of having 1 parcel of land with the house and barn on it, she'd have 2 parcels,

(i) 1 with the house under rent and only part of its immediately surrounding land (to minimize sales proceeds, basis & 1245 recapture allocable to it (& given its age, potentially 1250 recapture as well)

& (ii) all of the rest of the bulk of the realty with the barn/personal residence portion as the other parcel so that:

(I) the $250K exclusion's use would be used to its maximum availability,

(II) IRS/PA tax arguments would be mitigated &

(III) 1245/1250 recapture at ordinary tax rates would be reduced as much as possible.

This would only involve the following steps:

(1) having a surveyor come out and survey the separate properties & coming up with a legal metes & bounds description for each to use on the new deeds (described below);

(2) preparing & filing 2 new deeds from & to herself with the County courthouse, 1 conveying the residence portion to herself & the other conveying the rental portion to herself &

(3) for consistency purposes & to further avoid any IRS/PA arguments, reclassify the small rental portion in the property tax assessor's books & records as commercial rental property instead of being property that she used as her residence & simultaneously refiling a new homestead exemption & personal residence classification filing for the residence portion.

Taking these simple steps at minimal cost will save LOTS of taxes & avoid lots of potential headaches & challenges.

PS: Don't forget to remind her to see if "GRANDMAMA" can account for and add up all of the 263 capitalizable expenditures for the property, barn, house, etc. over all of the years and add them into each property's bases for gain calculation purposes. She presumably made substantial changes to the barn to make it into a residence and probably made several changes to the house to rent it out, all of which should naturally be taken into account.

"THE TAX-DADDY"
DEAN YOUNG, Tax/Business Attorney Specialist
Atlanta, GA

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