AgDM newsletter article, August 1998

Iowa state income tax treatment of long-term capital gains income – H.F. 2513 *

Neil Harlby Neil E. Harl, Charles F. Curtiss Distinguished Professor in Agriculture and Professor of Economics, 515/294-6354, harl@iastate.edu

The 77th Iowa General Assembly (1998) made significant changes in long-term capital gains treatment for Iowa income tax purposes.

Previous Law

The Iowa Code provided for a 45 percent deduction for:

a) “net capital gains from the sale of real property used in a business, in which the taxpayer materially participated for ten years and which has been held for a minimum of ten years, or from the sale of a business in which the taxpayer was employed or in which the taxpayer materially participated for ten years and which has been held for a minimum of ten years.  The sale of a business means the sale of all or substantially all of the tangible personal property or service of the business.”  1/

b) “net capital gain from the sale of cattle or horses held by the taxpayer for breeding, draft, dairy, or sporting purposes for a period of twenty-four months or more from the date of acquisition; but only if the taxpayer received more than one-half of the taxpayer’s gross income from farming or ranching operations during the tax year.”

c) “net capital gain from the sale of breeding livestock, other than cattle or horses, if the livestock is held by the taxpayer for a period of twelve months or more from the date of acquisition; but only if the taxpayer received more than one-half of the taxpayer’s gross income from farming or ranching operations during the tax year.”

d) “net capital gain from the sale of timber.”

Under pre-1998 law, the net capital gain of the four provisions could not exceed $17,500 for the tax year.

After December 31, 1998

The 1998 amendments made several changes in the above provision.

1) The 45 percent deduction is increased to a 100 percent deduction.

2) The first provision above, involving net capital gain from the sale of real property used in a business, was amended to add the following language—

“However, where the business is sold to individuals who are all lineal descendants of the taxpayer, the taxpayer does not have to have materially participated in the business in order for the net capital gain from the sale to be excluded from taxation.”

“However, in lieu of the net capital gain deduction in this paragraph and paragraphs “b,” “c,” and “d,” referring to the above listing where the business is sold to individuals who are all lineal descendants of the taxpayer, the amount of capital gain from each capital asset may be subtracted in determining net income.”.

3) The 1998 amendments also provided a definition of “lineal descendant” as including—

“…children of the taxpayer, including legally adopted children and biological children, stepchildren, grandchildren, great-grandchildren, and any other lineal descendants of the taxpayer.”  Act, Sec. 2.

4) The 1998 amendment repealed the limitation of $17,500 per taxpayer, and replaced that paragraph with a provision specifying that the new capital gains deduction is not allowed for purposes of computing a net operating loss.

1/  The Internal Revenue Code requires that material participation be “regular, continuous and substantial.”  This is a more demanding standard than material participation as defined for social security purposes.  Both definitions are used in federal law.  The Iowa legislature chose the standard requiring the greater degree of participation.

* Reprinted with permission from the Agricultural Law Digest, an Agricultural Law Press Publication.  Footnotes not included.

 

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