Tax Update Blog: Permalink

« Previous · Tax Update Blog Home · Next »

GOVERNOR SIGNS HOLDING PERIOD BILL

March 31, 2006

Governor Vilsack on Wednesday signed into law the bill (H.F. 2465) on the "holding period" rules for Iowa's capital gain exclusion. The bill applies federal tax law holding period rules in determining whether property has been "held" the necessary 10 years to qualify for the Iowa capital gains breaks.

This bill overrides a risible Department of Revenue position on holding periods effective for capital gains on sales starting January 1, 2006. It's unclear whether the bill will have any effect on pending disputes with the department.

WHO QUALIFIES FOR THE EXCLUSION

The exclusion applies in several different circumstances, including:

1. Capital gains on the sale by an individual or pass-through entity of substantially all of the assets of a business held at least 10 years, if the taxpayer "materially participated" in the business for at least 10 years.

2. The sale of real estate held for at least ten years out used in a business in which the taxpayer materially participated for 10 years.

3. Gain to a shareholder on the liquidation of a corporation in which the taxpayer meets the 10-year holding and participation requirements.

"Material participation" is determined using the federal standards from the "passive activity" rules. They are summarized in the extended entry below.

MATERIAL PARTICIPATION BASICS

The regulations say you achieve "material participation" in non-real estate activities for a tax year if:

-You participate at least 500 hours; or
-You participate at least 100 hours and at least 500 hours in that and other "100 hour" activities; or
-You participate at least 100 hours and more than anybody else, or
-You are the only participant; or
-You materially participated in five of the past ten years )or in any three years for a service activity).

There is also a "facts and circumstances" test, but don't count on it.

A special rule apples to real estate. If you are not a "real estate professional," losses are normally passive no matter what, unless you provide "extraordinary" personal services.

If you are a "real estate" professional," you can apply the normal material participation rules to determine whether you have a passive activity. To be a real estate professional, you have to spend at least half your working hours - not less than 750 hours annually - in "real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade."

 • Eye on the Legislature ~ • Iowa Tax Law       Bookmark: del.icio.us • Digg • reddit