Iowa's "ten and ten" capital gain break eliminates the tax on certain capital gains on property held for ten years by a taxpayer who has also "materially participated" in the business for ten year. The state has issued a ruling explaining how it works for installment sales when the seller dies during the installment period, and the installment receivable goes to a trust with the taxpayer's spouse as the beneficiary:
Therefore, since the taxpayer is still receiving this capital gain income from the trust and the taxpayer met the ten year ownership and ten year material participation test at the time of the installment sale, the taxpayer is still entitled to claim the Iowa capital gains exclusion.
But while that works if the spouse is the trust beneficiary, it doesn't work if the beneficiaries are the materially-participating taxpayer's children:
Finally, you are correct that upon the death of the taxpayer and the subsequent distribution of the taxpayer and trust shares of the capital gains to the children of the deceased, these capital gains reported by the children would not qualify for the Iowa capital gains exclusion since the material participation and holding period requirements were not met by the children at the time of the original sale.
Cite: Policy letter 09201020
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