Reducing Taxes on Farm and Ranch Property with a Charitable Remainder Trust
By Chris Nolt
By selling all or part of a farm or ranch through a Charitable Remainder Trust (CRT), one is able to bypass capital gains and ordinary income taxes on the sale. This enables a farm or ranch owner to invest the full proceeds from the sale, undiluted by tax.
If an individual sells their farm or ranch and takes cash proceeds from the sale, they may end up with 25 percent less money to invest after paying taxes. The ability to invest money, which would have gone to taxes, can generate significantly more income for retirement or other purposes.
For example, if an individual is selling land valued at $2 million with a cost basis of $200,000, their tax savings from selling the property through a CRT could amount to roughly $400,000 or more, depending on the state they are located in and whether or not their property is subject to the Medicare Surtax.
If they invest this $400,000 tax savings and elect a seven percent payout from their CRT, they could conceivably receive $20,000 to $30,000 more money each year.
In addition to bypassing capital gains and income taxes on the sale of property, an individual may also generate a charitable deduction from contributing the land to the CRT.
This deduction can lower an individual’s federal income tax bill for the year they make the contribution to the CRT. And, any unused amount of the deduction can be carried forward for up to five years.
Some states, such as Montana, also offer a tax credit, which can further reduce income taxes.
It is often a good idea to take cash out of a sale for various reasons. Depending on the situation, one may be able to wipe out the income taxes that would normally be due on the cash proceeds through the charitable deduction they receive.
I’ve been approached by several people who wanted to use a CRT on the sale of their property, but they already had a signed buy-sell agreement on their land. Unfortunately, it was too late for them to use the CRT.
If an individual has a signed contract on their property, they can’t use a CRT on the sale of the property because the Internal Revenue Service (IRS) deems it a “pre-arranged sale.” The problem with a pre-arranged sale, is under the assignment of income doctrine, the capital gain can be attributed to the donor of the property.
The question is how far down the path of sale a donor can go before the gain is recognized to the donor. Once recognized, it cannot be assigned to another party.
Although not completely clear, there is authority that once a buy-sell is signed, the donor has legally committed the CRT trustee to sell the property to the buyer and to do so on the terms of the buy-sell, removing all discretion from the trustee and requiring the donor to recognize the capital gain.
Besides providing a donor with several financial benefits, a CRT also enables a person to make a sizeable, tax-efficient gift to charity. Leaving a legacy of love could ultimately be what an individual values most from a CRT.
A Charitable Remainder Trust offers many financial and other benefits for those selling a farm or ranch. If an individual is selling or considering selling their farm or ranch and would like to save taxes on the sale, generate passive income for retirement and leave money to charity when they pass, a CRT is something to consider.
However, they need to remember they shouldn’t wait until they have a signed buy-sell agreement before speaking with an advisor who is experienced in using a CRT for farm and ranch sales.
Chris Nolt is the author of the book “Financial Strategies for Selling a Farm or Ranch” and the owner of Solid Rock Wealth Management, Inc. and Solid Rock Realty Advisors, LLC, sister companies dedicated to working with families around the country who are selling a farm or ranch and transitioning into retirement. To order a copy of Chris’s book, call 800-517-1031 or visit Amazon.com. For more information, visit solidrockproperty.com and solidrockwealth.com.