Sale of Development Rights: Tax Issues

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Sale of Development RightsTax Issues

• Dennis Pennington, MSUE
• Agriculture Natural Resources Agent
• Barry County

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What is PDR Program?

• Landowner bundle of rights
• Right to develop
• Can be bought, sold, relinquished (voluntary)
• Enabled by P.A. 262
• In Barry County
• Ordinance adopted December 2002
• Created CAPB to administer county PDR program

3
Farmland Conversion

• 355,942 total acres
• 1982 188,096 acres
• 1997 164,815 acres
• 23,281 acres
• 12.4 decrease
• 1 township
• 4.25 acres/day
• 0 acres by 2103

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PDR Program-Barry County

• Fall 2003
• 35 applications
• 5,143 acres
• Questions
• Capital gain
• Estate planning

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Income vs. Capital Gain

• Income tax paid on earned income (ordinary
  income)
• Corn
• Milk
• Apples
• Wages
• Capital gain - from the sale of capital items
• Tractor
• Raised livestock
• Real Estate

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Tax Bracket Example 2Married Filing Jointly
Enter Taxable Income (after deductions exemptions) Enter Taxable Income (after deductions exemptions) Enter Taxable Income (after deductions exemptions) Enter Taxable Income (after deductions exemptions) Enter Taxable Income (after deductions exemptions)
500,000 500,000 500,000
Range Range Range Bracket Amount
- to 14,300 10 1,430
14,300 to 58,100 15 6,570
58,100 to 117,250 25 14,788
117,250 to 178,650 28 17,192
178,650 to 319,100 33 46,349
 over 319,100 35 63,315
Total 149,643
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Example 2
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Basis Allocation Example

• Example
• Purchased 100 A in 1990 for 300,000
• Basis allocated to
• Residence 100,000
• Farm Building 1 40,000
• Timber 50,000
• Original purchase price 300,000
• minus allocated items - 190,000
• Remaining Basis 110,000
• Or 1,100 per acre

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Capital Gains

• Under Revenue Ruling 77-414, gain from sale of
  Property Development Rights is subject to capital
  gains tax rates (see handout).
• Capital gains rates as of May 6, 2003

Ordinary Rate Bracket Married Filing Jointly Single
10 15 5 5
gt 15 15 15
15 Tax Bracket Ceiling (2004) 58,100 29,050
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Example

• Ordinary Income 30,000
• Capital Gain 60,000

Range Range Range Bracket Income Tax Capital Gain Tax Rate Capital Gain Tax
- to 14,300 10 1,430
14,300 to 58,100 15 2,355 5 1,405
58,100 to 117,250 25 - 15 4,785
117,250 to 178,650 28 -
178,650 to 319,100 33 -
over   319,100 35 -    
Total 3,785 6,190
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Deferred Like Kind Exchange

• IRC 1031
• Proceeds held by qualified intermediary
• Replacement property must be identified within 45
  days of sale of development rights
• Exchange of property must be within 180 days from
  the date of sale gives you 135 days to close
  the deal on the new property

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Other Issues

• Social Security
• Capital gain reduces excludable amount
• Donation of Development Rights
• Estate Planning
• Pass farmland to sibling wanting to farm
• Pass development rights value to others
• Sell for reduced before death?
• Let property be inherited through will?
• Basis?

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Social Security Issues

• Schedule F Income 20,000
• Interest Income 4,000
• Social Security 16,000
• Total 40,000
• Excludable social security (16,000)
• Total taxable income 24,000
• Ordinary Tax 2,885

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Social Security Issues

• Schedule F Income 20,000
• Interest Income 4,000
• Sale of Development Rights 60,000
• Social Security 16,000
• Total 100,000
• Excludable social security (2,800)
• Total taxable income 97,200
• Ordinary Tax 4,865

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Questions?

• Email pennin34_at_msu.edu
• Web msue.msu.edu/barry
• Land Use