Kristine Tidgren outlined new directives for this year. She is an adjunct assistant professor at Iowa State University in the Agricultural Education and Studies Department, and the director for the Center for Agricultural Law and Taxation.

Tidgren said Iowans no longer pay Iowa tax on their retirement income. This law began in 2023, but she said Iowans are now filing their first returns since that law went into effect. This affects people who are disabled, or who are 55 years of age or older who receive qualified retirement income — including IRA and 401K distributions, IPERS pensions, and more.

She said that, for many farmers whose income was re-invested into their farms, they may not have any of those distributions. But if they receive rent from their farm land after they retire, that rental income will be excluded from Iowa tax.

Tidgren said Iowa Code allows eligible individuals to exclude from Iowa income the net income received from a farm tenancy agreement, covering real property that has been owned by an eligible individual for 10 or more years, if the eligible individual “materially participated” (worked 500 hours or more) in a farming operation for 10 or more years.

-Messenger photo by Karen Schwaller
Kristine Tidgren visited with audience members following her presentation on upcoming farm tax law changes at her presentation during the Northwest Iowa Ag Outlook event in Spencer.

Time that spouses worked on the farm also counts toward that number.

“If I worked 100 hours on the farm and my husband worked 500 hours, we both worked 600 hours on the farm in the eyes of the law, and that’s helpful if someone passes away,” Tidgren said. Hours worked by children, employees, custom farmers, etc., cannot be counted as material participation.

Farmers must prove they have owned rented-out property for 10 or more years, must be the landlord, and have a written lease in place.

Land owners who have only cash rented their property do not qualify as “materially participating,” and are not eligible for that exclusion.

Those participating in this tax exclusion must be 55 years of age or older, retired from (or no longer materially participating in) working on the farm, and must be the landlord receiving income from the land in some form of rent. Those renting out their land for income are no longer materially participating.

If crop share producers put their income on a Form 4835 and do not pay self-employment tax, they are considered not materially participating, and qualify for the exclusion.

“But if I pay self-employment tax on my crop share income because I’m making decisions on the farm or paying for half of the cost and furnish half the tools and consult with a tenant, then I have to put it on a Scheule F and pay self-employment tax — I’m not considered a retired farmer, so I can’t exclude this income,” said Tidgren.

She said CRP land does not count as a farming business, and is not eligible for the exclusion.

“If you were a farmer and now you still have CRP but you don’t materially participate in your farming business anymore, your CRP income is not going to prevent you from qualifying for the rental income exclusion for the ground you’re renting out,” said Tidgren.

However, income from the CRP itself does not get to be excluded since it is not considered farm rental income.

Affected farmers will need to reflect this decision on their Iowa tax forms, making a “single lifetime election” to take part in the income exclusion option, or the CGD.

“If this year you file your tax return and make an election for the Iowa capital gains deduction, you can’t ever make this (income exclusion) election,” said Tidgren. “Also, if you choose to exclude your rental income this year, you’re making a lifetime election, and if you sell the property later, you will not be eligible to exclude the gain from Iowa tax on that sale.”

She added that if farmers decide to exclude their rental income, they can no longer take the Iowa beginning farmer tax credit, nor the Iowa capital gain deduction.

Holding properties

Tidgren said if farmers own two parcels of land, having owned one for 50 years and the other for only five years, and both are rented out, farmers can take the farm rental income exclusion for the parcel owned for 50 years, but not for the parcel owned for five years, until it has been held for another five years.

“If you participated in a ‘lifetime exchange,’ (where land has been traded), you get to count the holding period of the property you relinquished because your basis just carried over,” said Tidgren.

She said those who are “remainder interest holders” of land handed down from family get to count the entire period of time the previous holder had the life estate as part of their own holding period.

Tidgren said for married couples filing jointly and holding property as joint tenancy with right of survivorship (WROS), the land automatically goes to the surviving spouse upon the death of the other. The surviving spouse can count 100 percent of time the land was held with the (deceased) spouse under the WROS stipulation.

She said in the case with land owned as “tenants in common,” the surviving spouse would need to wait 10 years to meet the holding requirement.

If land is owned by an LLC that is owned by more than one person, it’s a partnership and any rental income from that partnership is not eligible. If land is in an S Corporation, it is also not eligible, nor is land placed in an irrevocable trust. Assets in revocable living trusts are disregarded for federal purposes and are eligible for the exclusion.

Capital gains deduction

Tidgren said in 2023 the only people who could qualify for the CGD were those who had net gain from a sale of real property used in a farming business.

“This is what changed,” she said. “Real property used in a farming business is still eligible for the Iowa capital gains deduction as long as property had been owned for at least 10 years, and owners materially participated in a farming business for 10 years.”

Retired farmers can qualify, but their 10 years of material participation can be any 10 years in the past.

“The only way you can take the Iowa capital gains deduction if you’re retired is to make a single lifetime election, because to make (that election) to not pay capital gains tax is mutually exclusive from my single lifetime election to not pay tax on my farm income from a farm tenancy agreement. So you can do one or the other, but you can’t do both,” said Tidgren.

Tidgren added that those thinking about selling their land might want to reconsider taking the farm income exclusion.

She said anyone can take advantage of the Iowa CGD; but those aged 55 or older and no longer working on the farm are the ones who need to make a lifetime election choice.

“I can be 35 and sell my land, and if I’ve owned it for 20 years and materially participated on the farm for 10 years, I qualify for the Iowa capital gains deduction,” she said. “If I have in the past taken the Iowa (CGD) but now I’m a retired farmer and want to exclude my rental income, it’s OK — you can do it. The fact that you took it in the past doesn’t matter. What matters is — once you’re 55 or older and not retired, you can make only one or the other election, but not both.”

She said another way to sell land in Iowa and get the CGD is to sell farm land to a relative (excluding nieces/nephews/aunts/uncles). Selling that way does not require land ownership for 10 years, nor material participation on the farm for 10 years — yet the CGD is attainable.

“If selling farm land to a corporation or LLC, where one of my relatives owns any interest in that entity, then it qualifies as a relative, and I can meet the capital gains deduction requirement without having to have materially participated for 10 years or owned the property for 10 years,” said Tidgren.

She said of livestock producers — no farmer gets to take the Iowa CGD for the sale of their livestock anymore unless they’re a retired farmer and liquidating at least 90 percent of the farm business. Those farmers would be able to exclude the gain from the sale of the livestock.

More information on the Iowa tax law changes can be found at the Center for Agricultural Law and Taxation at https://www.calt.iastate.edu > people.

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