1. Sale of Development Rights: Tax Issues Dennis Pennington, MSUE Agriculture & Natural Resources Agent Barry County

2. What is PDR Program? Landowner bundle of rights Landowner bundle of rights Right to develop Right to develop Can be bought, sold, relinquished (voluntary) Can be bought, sold, relinquished (voluntary) Enabled by P.A. 262 Enabled by P.A. 262 In Barry County: In Barry County: Ordinance adopted December 2002 Ordinance adopted December 2002 Created CAPB to administer county PDR program Created CAPB to administer county PDR program

3. Farmland Conversion 355,942 total acres 355,942 total acres 1982 = 188,096 acres 1982 = 188,096 acres 1997 = 164,815 acres 1997 = 164,815 acres 23,281 acres 23,281 acres 12.4% decrease 12.4% decrease ~ 1 township ~ 1 township 4.25 acres/day 4.25 acres/day 0 acres by 2103 0 acres by 2103

4. PDR Program-Barry County Fall 2003 Fall 2003 35 applications 35 applications 5,143 acres 5,143 acresQuestions Capital gain Capital gain Estate planning Estate planning

5. Income vs. Capital Gain Income tax paid on earned income (ordinary income) Income tax paid on earned income (ordinary income) Corn Corn Milk Milk Apples Apples Wages Wages Capital gain - from the sale of capital items Capital gain - from the sale of capital items Tractor Tractor Raised livestock Raised livestock Real Estate Real Estate

6. Tax Bracket: Example 2 Married Filing Jointly Enter Taxable Income (after deductions & exemptions) $500,000 RangeBracketAmount $ - $ - to to $ 14,300 $ 14,30010% $ 1,430 $ 1,430 $ 14,300 to to $ 58,100 $ 58,10015% $ 6,570 $ 6,570 $ 58,100 to to $ 117,250 $ 117,25025% $ 14,788 $ 14,788 $ 117,250 $ 117,250 to to $ 178,650 $ 178,65028% $ 17,192 $ 17,192 $ 178,650 to to $ 319,100 $ 319,10033% $ 46,349 $ 46,349 over $ 319,100 $ 319,10035% $ 63,315 $ 63,315 Total $ 149,643 $ 149,643

7. Example 2

8. Basis Allocation Example Example: Example: Purchased 100 A in 1990 for $300,000 Purchased 100 A in 1990 for $300,000 Basis allocated to: Basis allocated to: Residence$100,000 Residence$100,000 Farm Building #1$40,000 Farm Building #1$40,000 Timber$50,000 Timber$50,000 Original purchase price=$300,000 Original purchase price=$300,000 minus allocated items-$190,000 minus allocated items-$190,000 Remaining Basis=$110,000 Remaining Basis=$110,000 Or $1,100 per acre Or $1,100 per acre

9. Capital Gains Under Revenue Ruling 77-414, gain from sale of Property Development Rights is subject to capital gains tax rates (see handout). Under Revenue Ruling 77-414, gain from sale of Property Development Rights is subject to capital gains tax rates (see handout). Capital gains rates as of May 6, 2003 Capital gains rates as of May 6, 2003 Ordinary Rate Bracket Married Filing Jointly Single 10% & 15% 5%5% > 15% 15%15% 15% Tax Bracket Ceiling (2004) 58,10029,050

10. Example Ordinary Income: $30,000 Ordinary Income: $30,000 Capital Gain: $60,000 Capital Gain: $60,000 RangeBracket Income Tax Capital Gain Tax Rate Capital Gain Tax $ - to $ 14,30010% $ 1,430 $ 14,300 to $ 58,10015% $ 2,3555% $ 1,405 $ 58,100 to $ 117,25025% $ -15% $ 4,785 $ 117,250 to $ 178,65028% $ - $ 178,650 to $ 319,10033% $ - over $ 319,10035% $ - Total $ 3,785 $ 6,190

11. Deferred Like Kind Exchange IRC 1031 IRC 1031 Proceeds held by qualified intermediary Proceeds held by qualified intermediary Replacement property must be identified within 45 days of sale of development rights Replacement property must be identified within 45 days of sale of development rights Exchange of property must be within 180 days from the date of sale ~ gives you 135 days to close the deal on the new property Exchange of property must be within 180 days from the date of sale ~ gives you 135 days to close the deal on the new property

12. Other Issues Social Security Social Security Capital gain reduces excludable amount Capital gain reduces excludable amount Donation of Development Rights Donation of Development Rights Estate Planning Estate Planning Pass farmland to sibling wanting to farm Pass farmland to sibling wanting to farm Pass development rights value to others Pass development rights value to others Sell for reduced $ before death? Sell for reduced $ before death? Let property be inherited through will? Let property be inherited through will? Basis? Basis?

13. Social Security Issues Schedule F Income20,000 Schedule F Income20,000 Interest Income4,000 Interest Income4,000 Social Security16,000 Social Security16,000 Total40,000 Total40,000 Excludable social security(16,000) Excludable social security(16,000) Total taxable income24,000 Total taxable income24,000 Ordinary Tax2,885 Ordinary Tax2,885

14. Social Security Issues Schedule F Income20,000 Schedule F Income20,000 Interest Income4,000 Interest Income4,000 Sale of Development Rights60,000 Sale of Development Rights60,000 Social Security16,000 Social Security16,000 Total100,000 Total100,000 Excludable social security(2,800) Excludable social security(2,800) Total taxable income97,200 Total taxable income97,200 Ordinary Tax4,865 Ordinary Tax4,865

15. Questions? Email: pennin34@msu.edu pennin34@msu.edu Web: msue.msu.edu/barry “Land Use”