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STAYIN' ALIVE: DEATH COSTS SPOUSE IOWA CAPITAL GAIN EXEMPTION

May 23, 2005

The Iowa Department of Revenue wants to encourage immortality. That seems to be the message of a tax policy letter posted on the Department website this morning, anyway.

Iowa has a rule that waives taxes on the sale of some real estate used in a business and "held" for over ten years. Through its interpretation of the statute, the Department of Revenue says that held doesn't mean what it means elsewhere in the tax law. This means that if you are a farmer, maybe you'd better sell the farm before you, um, buy the farm.

In the letter issued today, a farm couple owned thier farm as tenants in common, with the husband "materially participating" in the farm operation. The husband died in December 2003, having owned the farmland for more than ten years.

The widow inherited the farm, and later sold it. The Department says that only "her" 1/2 share qualified for the capital gain exclusion; the inherited half started a new holding period.

The Department says that the tax would have been avoided if the farm had been held in a joint tenancy, rather than as tenants in common:

If the ownership had been in joint tenancy, both the husband and wife would have been deemed to own 100% of the farmland, and the wife would have been entitled to the capital gain deduction on the sale of the entire property. However, because the farmland was held as tenants in common, the capital gain deduction only applies to the original one-half interest held by the wife.

Some might say that is a picayunish distinction without a difference. While that may be true, it still behooves businsess and farm owners to carefully consider how they title their real estate if they care to use the Iowa exclusion.

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