Selling 80 acres for $1.1M triggered a $950,000 capital gain, top capital gains rates, a 3.8% net investment income tax, and IRMAA Medicare surcharges two years later. Holding the land until death would have erased the entire embedded gain through stepped-up basis, making the sale a costly conversion of a near-tax-free inheritance. An installment sale, 1031 exchange, or simple lease arrangement could have deferred or eliminated most of the tax bill if structured before signing the purchase agreement.
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Advisor.com's free matching tool pairs you with vetted fiduciaries from major national firms, all in under three minutes. See who you match with today. Life is good for a 72-year-old Iowa farmer who's ready to retire.
He's selling his 80-acre farm for $1.1 million and he has about $310,000 in an IRA. He only paid $150,000 for the property decades ago, which means a huge profit. Unfortunately, it also means a huge tax bill.
This scenario is common across the Corn Belt right now. Ground bought in the 1970s or 1980s carries an enormous embedded gain, and one closing pulls all of it into one tax return. Recognizing roughly $950,000 of long-term capital gain in a single year lands the farmer squarely in the top long-term capital gains bracket.
On top of that, the 3.8% net investment income tax applies to investment income once modified adjusted gross income clears $200,000 single or $250,000 married filing jointly. Then the Social Security tax torpedo hits. The thresholds that decide how much of a benefit gets taxed, $25,000 for single filers and $32,000 for married filing jointly, were written into law in 1983 and 1984 and have never been indexed for inflation.
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