Or. Admin. Code § 150-317-0120

Current through Register Vol. 63, No. 11, November 1, 2024

Section 150-317-0120 - Farm Capital Gain

(1) This rule is effective July 31, 2010 and applies to all tax years open to examination.

(2) Definitions. For purposes of ORS 317.063 and this rule:

(a) "Substantially complete termination" means the taxpayer is:

(A) No longer involved, directly or indirectly, in a trade or business engaged in farming, or

(B) No longer owns, directly or indirectly, property used in the trade or business of farming.

(b) "A trade or business engaged in farming" means a distinct farming operation separately run from the taxpayer's other businesses. Businesses that share employees, equipment, buildings, or land are not separate businesses. Businesses that share records, accounts, registration, identification numbers, or a business name are also not separate businesses.

(3) A taxpayer's net long-term capital gain qualifies for the reduced tax rate if all four of the following tests are met:

(a) Asset Test. The gain is derived from either IRC section 1231 assets or an ownership interest of at least 10 percent in an entity.

(b) Use Test. The property that was sold consisted of:

(A) An ownership interest in an entity engaged in the trade or business of farming; or

(B) Property that was predominantly used in the trade or business of farming.

(c) Relationship Test. The assets are not sold to a related taxpayer as defined under IRC section 267.

(d) Termination Test. The sale is a substantially complete termination of all of the taxpayer's ownership interests in:

(A) A trade or business engaged in farming; or

(B) Property that is predominantly used in the trade or business of farming.

(4) Asset Test. The part of the taxpayer's net long-term capital gain that is eligible for the reduced rate must be from capital assets under IRC section 1231 or a 10 percent or more ownership interest in an entity engaged in the trade or business of farming.

Example 1: Forty years ago, Corporation A purchased an orchard next to the company's row crop farm. The company did not regularly harvest the fruit or care for the trees but allowed its employees and their families to use the fruit. Last year, the urban growth boundary moved to include the company's parcel. Corporation A wanted to sell the property to developers so it had all the trees removed and sold the property. The sale of the orchard does not qualify for the reduced rate because it was not held as a trade or business; thus, it was not an IRC section 1231 asset. It was land held for investment and personal use.

(5) Use Test. The asset sold must be predominantly used in the trade or business of farming. Any other use of the asset must be incidental to, and not interfere with, the primary purpose of being engaged in the trade or business of farming.

(a) Property used 80 percent or more in the trade or business of farming is considered and presumed to be predominant use. Accepted farming practices common to the type of farming activity and region, such as land lying fallow for one year, are included in the trade or business of farming.

(b) Property used more than 50 percent but less than 80 percent in a farming trade or business, qualifies as predominant if the difference between the actual percentage use in a farming trade or business and 80 percent use in a farming trade or business is incidental. Incidental use does not include holding property as an investment, using property for personal (non-business) use, or using property for another business. Incidental use includes, but is not limited to:

(A) Farmland that is bordered by or contains a waterway;

(B) Land that consists of terrain that cannot be farmed (i.e. marshland, desert);

(C) Land that contains a utility easement that makes farming impractical or impossible; or

(D) The period of the time when the farm property or business was "actively for sale" immediately prior to the sale. A property was "actively for sale" if the property was listed and advertised for sale for a price comparable to similar properties and the seller did not reject any reasonable offers.

(c) Property used for personal or business activities that take place on the land concurrently and do not interfere with the primary farming trade or business use are considered incidental use.

(d) Allocation. Property that is used less than 80 percent in a farm trade or business may be allocated between the actual portion that is predominantly used in the business of farming and the portion not predominantly used in the business of farming.

Example 2: BJ Farms raised corn and beans on 500 acres the entire time it owned the acreage. BJ Farms used the cornfields as a corn maze after the corn was harvested. BJ Farms sold the 500 acres to CJ Farms and recognized a capital gain. Assuming the gain from the sale meets the other three tests, the gain from the sale qualifies for the reduced tax rate because BJ Farms used the property predominantly (80 percent or more) in the trade or business of farming even though the company used the farmland for an incidental purpose after the harvest.

Example 3: D & D, Inc owned and operated a 30 acre farm. The farm had a waterway and riparian land that was not farmed, which took up 10 acres of the farm. Assuming the company meets the other three tests, D & D, Inc qualifies for the reduced tax rate because the property was predominantly used in the business of farming. The farm use qualifies as predominant for the entire 30 acres because the farm use was more than 50 percent, but less than 80 percent and the 33 percent (10 acres/30 acres) not used for farming was incidental.

Example 4: John B. Dairy, Inc sold 20 acres of land. The company owned the land and leased out 15 acres to a farmer who grew crops. The remaining 5 acres was made into baseball fields where the company allowed local Little League teams to use it for practices and games. Assuming John B. Dairy, Inc meets the other three tests, the 15 acres used for farming qualifies for the reduced tax rate.

(6) Relationship test. The gain from the sale of an asset does not qualify for the reduced tax rate if the asset is sold to a related taxpayer under IRC section 267 even if all of the other three tests are met.

Example 5: Green Beans Inc and Sweet Corn Inc own a farm together as a partnership. The partnership decides to sell the business to BJ Farms, (the parent company). Assume the sale meets the other three tests. The Green Beans Inc and Sweet Corn Inc capital gain does not qualify for the reduced tax rate because Green Beans Inc and Sweet Corn Inc are related to BJ Farms under IRC section 267.

(7) Termination Test. If a taxpayer sold an interest in a trade or business that is engaged in farming, the taxpayer may not be directly or indirectly engaged in that farming trade or business after the sale. The sale of the taxpayer's interests through an installment sale constitutes a substantially complete termination for purposes of ORS 317.063 and this rule. A taxpayer has substantially terminated its interests in the trade or business of farming even though the taxpayer retained a portion of the farm for personal use.

Example 6: Happy Cow Dairy Inc, (Parent Corporation) owned two subsidiaries, a dairy operation and a hop farm. The two businesses were completely separate. They had separate employees, equipment, and records. The two businesses also had different names, records, and federal identification numbers. Happy Cow Dairy Inc sold the dairy farm. After selling all of the dairy equipment and dairy cows, the company realized a capital gain of $350,000. The company decided not to sell the hop farm. The gain on the sale of the dairy operation qualifies for the reduced tax rate. Even though the company still owned the hop farm, it had sold the entire dairy business.

(8) Depreciation Recapture. IRC section 1231 gain may be treated as ordinary income under IRC sections 1245 and 1250 recapture rules. If the capital asset is subject to depreciation recapture under IRC sections 1245 or 1250, the portion of the gain that is treated as ordinary income does not qualify for the reduced tax rate.

Example 7: JD Inc sold its farm, which included three silos. All four tests were met. The silos are capital assets subject to IRC section 1245 recapture. The part of the gain from the sale of the silos that is treated as ordinary income is not eligible for the reduced tax rate. However, the part of the gain from the sale of the silos that is treated as long-term capital gain on the federal return is eligible for the reduced tax rate on the Oregon return.

(9) Capital loss. If all four tests are met and the taxpayer is reporting a capital loss, it could affect the capital gain eligible for the reduced tax rate. Compute the net capital gain or loss from all other property sales or exchanges for the year that are taxable to Oregon. If it results in a net capital loss, the amount eligible for the reduced tax rate is the qualifying farm capital gain minus the net capital loss from other property sales or exchanges that are taxable to Oregon.

Example 8: B Inc sold a farming business for a net long-term capital gain of $800,000. During the year, the company also sold other property for a net capital loss of $150,000. Assuming the sale of the farm business meets all four tests, B Inc is only eligible for the reduced tax rate on $650,000 (net farm long-term capital gain minus other net capital loss) of the taxable income.

(10) Installment Method under IRC section 453. Installment sales are eligible for the reduced tax rate if the sale meets all four tests as explained in section (2) of this rule. The amount of capital gain eligible for the reduced tax rate must be determined each year. The percentage of gain eligible for the reduced tax rate is equal to the qualifying farm long-term capital gain from the sale divided by all capital gain from the sale. Apply this percentage to the capital gain from the sale reported each year to determine the amount that qualifies for the reduced tax rate. If there is capital loss from the sale of other property as described in section (8) of this rule, during a tax year that the installment sale is reported, this may reduce the gain eligible for the reduced tax rate.

Example 9: Green Acres Inc sells its row crop farm in 2007 and meets all four tests to receive the reduced tax rate. The company elects to recognize the income from the sale using the installment method under IRC section 453. Green Acre Inc will receive half of the sale price in 2007 and one-fourth of the sale price each in 2008 and 2009 plus interest. Of the capital gain from the sale, $300,000 qualifies for the reduced tax rate and $100,000 does not. The company's percentage eligible for the reduced tax rate is $300,000 of eligible capital gain divided by $400,000 of total capital gain, or 75 percent. The buyer also paid interest to Green Acres Inc, which is reported separately on the return. In 2007, the company will claim the capital gain from the sale of $200,000. Of that amount, 75 percent or $150,000 is eligible for the reduced tax rate. In 2008 and 2009, the company will claim the farm capital gain rate for $75,000 ($100,000 x 75 percent) of capital gain from the sale reported each year.

(11) Like-kind Exchanges. Like-kind exchanges may be eligible for the reduced tax rate when the gain is recognized, assuming all four tests are met. The taxpayer must keep detailed records to show that the property would have qualified for the reduced tax rate if it had been a sale instead of an exchange.

Example 10: Dee Farms decided to exchange farmland for investment property. The exchange meets all four tests. Dee Farms deferred $400,000 of capital gain. Later, Dee Farms sells the investment property and reports capital gain of $700,000. Of this amount, $400,000 is eligible for the reduced tax rate for farm capital gain, because it would have been eligible if the company had not deferred it.

(12) Sale in more than one tax year. Prior-year sales of farm property, or a farming business sold over more than one year, may be eligible for the reduced tax rate. It can take more than one year to sell a farming business or all of a taxpayer's property used in farming because the property is sold to more than one buyer. To qualify for the reduced tax rate, the taxpayer must be actively trying to sell all farm property (or all property from a farming business) from the year of the first sale until the year of the final sale. Each sale is separately considered to see if it meets the requirements to qualify for the reduced tax rate, but all farm property or property from a farming business must be sold within a reasonable amount of time (usually no more than three tax years from the first sale to the final sale of qualifying farm property) for any of the prior year sales to qualify. The reduced tax rate on the prior year sales cannot be claimed until the taxpayer has sold all farm property or all property from a farming business. A property is "actively for sale" if the property was listed and advertised for sale for a price comparable to similar properties and the seller did not reject reasonable offers.

Example 11: Sunshine Grass Seed Inc owns 1,000 acres of farmland in four different locations. The properties are treated as one business and all of the property is actively for sale. The company sells 200 acres to a neighboring farmer in 2006. Sunshine Grass Seed Inc files its 2006 tax return but cannot claim the reduced tax rate on the gain because it is not out of the business of farming. In November 2007, the company sells the remaining 800 acres of farmland to Dees Farms (an unrelated party). Sunshine Grass Seed Inc, files its 2007 tax return and the long-term capital gain from the sales qualifies for the reduced tax rate because the property was actively for sale the entire time. Sunshine Grass Seed Inc may now amend its tax return for 2006 and claim the reduced tax rate on the qualifying capital gain from the earlier sale.

(13) If a taxpayer sells farm property and then buys other farm property, the taxpayer may qualify for the reduced tax rate. The taxpayer must meet all four tests described in section (3) of this rule with the sale of farm property before purchasing other farm property to qualify for the reduced tax rate.

Example 12: JB Farms, sold the company's farm and equipment to start a retail business. After some difficulty in getting started, the company decides to go back to farming and purchased another farm. JB Farms qualifies for the reduced tax rate because the company had completely terminated its interest in property used in farming at the time of the sale and met the other tests.

Or. Admin. Code § 150-317-0120

REV 8-2010, f. 7-23-10, cert. ef. 7-31-10; Renumbered from 150-317.063, REV 67-2016, f. 8-15-16, cert. ef. 9/1/2016

Publications: Publications referenced are available from the agency.

Stat. Auth.: ORS 305.100, 317.063

Stats. Implemented: ORS 317.063