This bill allows sellers of qualifying farmland to exclude capital gains from income if the proceeds are reinvested in an individual retirement plan, contingent upon the buyer continuing to farm the land for ten years.
Mitch McConnell
Senator
KY
This bill proposes a new tax incentive allowing sellers of qualified farmland to exclude capital gains from their gross income if the proceeds are reinvested into an Individual Retirement Account (IRA). To qualify, the sale must be to an active farmer who agrees to a potential penalty tax if they stop farming the land within ten years. This provision also temporarily increases the annual IRA contribution limit based on the excluded gain amount.
Farmland Tax Bill Links Capital Gains Exclusion to IRA Savings, Puts 10-Year Tax Risk on Buying Farmers
This bill creates a brand-new tax break for sellers of farmland, but it comes with a major catch for the buyer. Essentially, if you sell qualified farmland to an active farmer, you can exclude the capital gain (the profit) from your income, but only up to the amount you immediately roll into your own Individual Retirement Account (IRA) within 60 days of the sale. This provision also temporarily allows the seller to bypass normal annual IRA contribution limits, meaning you can potentially super-size your retirement savings using the sale proceeds.
The Seller’s Sweetheart Deal: Retirement Boost
For the seller, this is a clear incentive to transfer land. Say you sell a parcel of land that yields a $200,000 capital gain. If you elect this exclusion and put $200,000 into your IRA within 60 days, you don't pay capital gains tax on that $200,000 this year. The bill explicitly allows this excluded gain amount to increase your annual IRA contribution limit (Section 408(r)), effectively letting you dump a large sum into a tax-advantaged account all at once. This is a powerful financial tool for landowners looking to retire, but they can’t also claim a standard tax deduction for that contribution—no double-dipping allowed.
The Buyer’s 10-Year Tightrope Walk
Here’s where things get complicated, and frankly, risky for the buyer. The buyer—who must be a "qualified farmer" actively involved in farming—has to sign an agreement consenting to a massive potential tax liability. If, within 10 years of the sale, the farmer either sells the land or stops using it for farming, they trigger a heavy penalty tax (subsection (c)). This penalty isn't based on their profit or loss; it’s based on the original amount of capital gain the seller excluded from their income, plus interest calculated from the year of the original sale.
Imagine a young farmer buys the land, signs the agreement, and two years later, a drought or unexpected health crisis forces them to sell or switch to a non-farming use. That farmer is now personally responsible for a penalty tax equal to the seller's original tax savings (calculated using the highest capital gain rate plus the Net Investment Income Tax rate), plus years of interest. This creates a severe, decade-long contingent liability that could financially ruin an active farmer if their business plan goes sideways. It’s a huge burden of compliance and risk placed entirely on the buyer to guarantee the seller’s tax break holds up.
Who Benefits and Who Bears the Risk?
This bill is highly beneficial for sellers looking to manage capital gains and boost their retirement savings, and it theoretically encourages land transfer to active farmers. However, the high-stakes clawback provision puts the financial risk squarely on the qualified farmer who buys the land. The buyer must be absolutely certain they can farm the land for a full decade, regardless of market conditions, weather, or personal circumstances. If they fail, the IRS gets three years from the date they are notified of the change in use to assess that potentially devastating penalty tax. While the bill aims to stabilize farming ownership, it does so by creating a massive potential financial trap for the next generation of farmers.