Sale of Business Property

[dmj4]

What are your opinions on a CPA telling a client that used his 141 acres as a farm for 40 years, to stop farming for 2 years and let the entire sale fall under personal use (121 exclusion) along with the sale of his home?

Have there been any court cases regarding this that I am not aware of?

Thanks

[jainen]

It is not enough

It is not enough that adjacent property not be used in a trade or business. It must be used as a part of the home. By taking it out of production it would seem to become investment property not his residence. To the extent that tax avoidance is his main motivation the plan won't work at all, notwithstanding that two years is a good minimum time frame. I think he has a weak case but if he has the courage and the bucks to take on the IRS, I could be swayed with an excellent presentation. Perhaps if he "undeveloped" the farmland and sold it as a park he would have a stronger argument.

[dmj4]

they fish

The grandkids will be fishing and riding 4-wheelers, like most everyone says. They also hunt in the woods area. He has not used the woods area for the farm, nor has he ever sold any timber from it.

He has an offer on it now but after hearing about the depreciation recapture and the fact that it is business property he may decide to decline.

[jainen]

Those are nice points

Those are nice points and a few photos in the file wouldn't hurt. You did explain that even if his basis is zero his tax would only be 15 to 25 percent of the inflated price, right? Two years from now maybe the value will be 25% less!

[OldJack]

It is not enough

I agree with Jainen. If I was going to plan to end the farm property (§1250) and convert to residential property (§121 ) I would want to establish a date for the ending to hang my hat on if audited. One might consider actions such as selling off the farm assets (other than the land) and filing a 1040 Sch-F marked final. An accounting for the withdrawal of everything not sold on form 4797 at a zero gain or notation that the assets were withdrawn might also help. I think you would have difficulty justifying the claim for exclusion for all land under §121 without some proof other than the not filing Sch-F for 2 years as stated.