Sale of Ranch in California

[LBR]

A client is selling their ranch for one price that includes 3 out buildings and a home on 900 acres. They have been producing income from the property as they have been growing and selling hay.
Can they take the $500,000.00 exclusion from the sale as they have owned and lived on the property for over 15 years?
Thanks

[ttbtaxes]

In general, Reg. 1.121-1(b)(3)(i) provides that you can include land as part of the residence, for sale purposes, if it meets these tests:

(A) The vacant land is adjacent to land containing the dwelling unit of the taxpayer's principal residence;

(B) The taxpayer owned and used the vacant land as part of the taxpayer's principal residence;

(C) The taxpayer sells or exchanges the dwelling unit in a sale or exchange that meets the requirements of section 121 within 2 years before or 2 years after the date of the sale or exchange of the vacant land; and

(D) The requirements of section 121 have otherwise been met with respect to the vacant land.

The sticky part for you is (B) the use provision. Here you need to look to Reg 1.1-121(b)(3)(e) where it discusses non-residential use of a portion of the property. Six examples are provided. My best guest is that the portion of the land that was used to grow and produce hay is taxable and can not be included in the gain exclusion under Section 121.