Oct 4, 2024 Understanding Rural Land Sale Benefits Understanding Rural Land Sale Benefits Tax Incentives for Selling Rural Land Before the End of the Year: Maximize Your Benefits Written By: Don Wagner, Il Land Broker, LandGuys As 2024 draws to a close, rural landowners have a unique opportunity to leverage various tax strategies to maximize their financial gains from a property sale. By timing the sale of rural land before the year’s end, sellers can capitalize on favorable tax rates and available deductions, significantly increasing the money they keep. Below are key tax incentives and strategies that landowners should consider to optimize their profits. Capital Gains Tax Rates and Savings Selling rural land can generate substantial capital gains, which will be subject to long-term capital gains tax. According to the IRS, the 2024 rates are as follows: 0% if your taxable income is less than or equal to: $44,625 for single and married filing separately $89,250 for married filing jointly and qualifying surviving spouse $59,750 for head of household 15% if your taxable income falls between: More than $44,625 and up to $492,300 for single filers More than $44,625 and up to $276,900 for married filing separately More than $89,250 and up to $553,850 for married filing jointly and surviving spouse More than $59,750 and up to $523,050 for head of household 20% if your taxable income exceeds the upper limits for the 15% bracket【source: IRS】. For detailed information about capital gains taxes, refer to the IRS’s Capital Gains and Losses documentation here. Example: If you purchased rural land for $300,000 and plan to sell it for $700,000 in 2024, your capital gain would be $400,000. If your taxable income falls within the 15% bracket, you would pay $60,000 in capital gains tax. This leaves you with $340,000. If you wait until 2025, potential tax law changes could result in higher rates, reducing your net profit. 1031 Like-Kind Exchange The 1031 exchange allows landowners to defer capital gains tax by reinvesting sale proceeds into another similar property. This strategy is useful for avoiding immediate tax liabilities while keeping your capital invested in real estate. How it works: You must reinvest the proceeds into another “like-kind” property within 180 days【source: IRS】. For more details on 1031 exchanges, see the IRS’s guidance on like-kind exchanges here. Example: If you sell your rural land for $700,000 and reinvest immediately, you defer the $60,000 capital gains tax, allowing you to keep all sale proceeds invested【source: IRS】. Qualified Business Income (QBI) Deduction For those whose property is part of a farming operation, the QBI deduction allows up to 20% of qualified business income to be deducted under Section 199A. The IRS provides specific guidance on the Qualified Business Income Deduction here. Example: If you earn $200,000 in business income from farming, you could deduct $40,000. If you’re in the 22% tax bracket, this translates into $8,800 in tax savings. Estate and Gift Tax Planning For 2024, the federal estate tax exemption is $13.61 million per individual and $27.22 million for married couples【source: IRS. The annual gift tax exclusion has increased to $18,000 per recipient【source: IRS. For more information, see the IRS’s guidelines on the estate tax here and the gift tax here. Example: If you gift $18,000 of land to each of your three children before selling, and with an estate subject to a 40% estate tax, this could save you $21,600. Conservation Easements for Tax Deductions A conservation easement allows landowners to donate or sell development rights to their land in exchange for significant tax deductions. You can deduct up to 50% of your adjusted gross income (AGI), and any unused deduction can be carried forward for up to 15 years【source: IRS. For details, refer to the IRS’s Conservation Easements information here. Example: If your land’s market value is $700,000 and its value drops to $400,000 after placing the easement, you could deduct $300,000, reducing your tax burden based on your income bracket. Conclusion: How Much Money Can You Save? Capital Gains Tax Savings: Deferring or locking in lower rates could save $60,000【source: IRS】. QBI Deduction: You could save up to $8,800 if your land is part of a farming operation【source: IRS】. Gift Tax Planning: Reducing your taxable estate could help avoid $21,600 in estate taxes on a $54,000 gift. Selling rural land before the end of 2024 offers numerous tax benefits. Consult a tax advisor to help structure your sale and maximize these incentives. If you’re interested in exploring your selling options, reach out to your local LandGuys agent for expert advice and personalized guidance. Sources: IRS, “Capital Gains and Losses,” available at: https://www.irs.gov/taxtopics/tc409 IRS, “Like-Kind Exchanges Under Section 1031,” available at: https://www.irs.gov/pub/irs-drop/rp-03-103.pdf IRS, “Qualified Business Income Deduction (Section 199A),” available at: https://www.irs.gov/newsroom/qualified-business-income-deduction-faqs IRS, “Estate Tax,” available at: https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax IRS, “Gift Tax,” available at: https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes IRS, “Conservation Easements,” available at: https://www.irs.gov/charities-non-profits/conservation-easements For those of you who want to see the math breakdown, here’s how we calculated the numbers in our examples: Capital Gains Example: Purchase Price: $300,000 Sale Price: $700,000 Capital Gain: $700,000 – $300,000 = $400,000 Capital Gains Tax at 15%: $400,000 × 15% = $60,000 After-Tax Profit: $400,000 – $60,000 = $340,000 Qualified Business Income (QBI) Deduction Example: Business Income: $200,000 QBI Deduction (20%): $200,000 × 20% = $40,000 Tax Savings at 22%: $40,000 × 22% = $8,800 Gift Tax Planning Example: Gift Amount per Child: $18,000 Number of Children: 3 Total Gift: $18,000 × 3 = $54,000 Estate Tax Savings (40%): $54,000 × 40% = $21,600 ** LandGuys and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. PARTNER WITH DON WAGNER Don’s multifaceted background spans over 30 years as a professional photographer, during which he cultivated an intimate knowledge of trophy deer and acquired top-quality properties. His dual proficiency in capturing the essence of the land and optimizing its potential makes him an invaluable resource for clients seeking a comprehensive understanding of rural properties. Don is committed to providing clients with unparalleled insights and opportunities in the realm of rural properties. Whether you’re seeking advice on maximizing property potential or exploring profitable land investments, Don Wagner stands ready to guide you with passion, precision, and a shared commitment to excellence. 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