This bill allows taxpayers to exclude capital gains from farmland sales if reinvested in individual retirement plans, under specific conditions regarding land use and buyer qualifications.
Mitch McConnell
Senator
KY
This bill amends the Internal Revenue Code to allow taxpayers to exclude capital gains from the sale of farmland to qualified farmers if the gains are reinvested in an individual retirement plan within 60 days. It sets conditions for what qualifies as farmland and a qualified farmer, and it imposes taxes if the land is later sold or used for non-farming purposes within 10 years. The bill also adjusts contribution limits to individual retirement plans to accommodate the reinvested capital gains and includes provisions to prevent double benefits and address involuntary conversions or like-kind exchanges.
New Bill Proposes Tax Break on Farmland Sales When Profits Fund Retirement, But With a 10-Year Farming Catch
This proposed legislation creates a new tax incentive aimed at keeping farmland in the hands of farmers. Essentially, if you sell qualifying farmland to a designated "qualified farmer," you could exclude the capital gains profit from your gross income, provided you roll that money into an Individual Retirement Plan (IRA) within 60 days of the sale. The amount you can exclude is capped by how much you actually contribute to your IRA during that window.
Trading Acres for Retirement Funds: How It Works
The core idea is straightforward: sell your farm property, boost your retirement savings, and get a tax break on the sale profit. To qualify, the land must be "qualified farmland property" – meaning you've used it or leased it for farming for most of the last decade. The buyer must be a "qualified farmer," defined as someone actively farming (per the Food Security Act of 1986) who signs a written agreement confirming this. A key feature is the temporary boost to your IRA contribution limit; for that year, you can contribute up to the amount of the excluded capital gain from the farmland sale, potentially allowing for a much larger retirement contribution than usual, specifically linked to this transaction.
The Fine Print: A Decade-Long Commitment
There's a significant string attached designed to ensure the land stays in agriculture. If the qualified farmer who bought the land sells it or stops using it for farming purposes within 10 years, a special tax kicks in. This tax equals the entire amount of gain the original seller excluded, multiplied by the highest capital gains tax rate plus the net investment income tax rate (section 1411), plus interest. This penalty underscores the bill's intent to preserve farmland, not just provide a temporary tax shelter. Both the seller and the buyer need to formally agree to these terms in writing, and the IRS gets an extended three-year window to assess this penalty tax if the land use changes. This 10-year lock-in could pose a real challenge if a farmer's circumstances change unexpectedly.
Who Benefits and What to Watch For
On paper, this looks like a win for landowners ready to sell (especially those nearing retirement) and for farmers looking to acquire land, as it incentivizes sales specifically to them. It links agricultural continuity with retirement security. However, the definition of a "qualified farmer" relies on existing regulations and a written agreement, which needs careful handling to avoid issues. The 10-year restriction, while promoting long-term farming, adds a layer of risk and complexity for the purchasing farmer. Taxpayers should also note that excluding capital gains means less tax revenue collected initially. Anyone considering this arrangement needs to understand the long-term commitment and potential tax consequences down the road if the land use changes.