How will Iowa’s new tax law affect retired farmers?
Law introduces two exemption options for retired farmers
Retired farmers will have several new tax exemptions to choose from under Iowa’s new tax law, which Gov. Kim Reynolds signed last week.
Retirement income taxes will be one of the first things eliminated under the new law. Beginning in 2023, Iowans will no longer pay state tax on income from 401(k) plans, pensions or other retirement accounts. Reynolds said the change “rewards retirees, who have worked… all their lives.”
But Rep. Lee Hein, a farmer and the chair of the House Ways and Means Committee, said that provision left out farmers who rent or sell their land to fund their retirement.
“We out here on the farm, our investment is to buy ground and farm it for a lifetime,” Hein, R-Monticello, said. “And then whenever we get to that retirement age, either rent it out or sell it to live off of it and retire. You can look at it as this is our 401(k).”
That’s why Iowa’s new tax law has two options for retired farmers, Hein said, essentially granting them the same retirement income tax cut. Farmers may choose to exempt the income they receive from renting out their farmland, or they may receive a tax exemption from selling their farm property.
How does the farm lease income tax exemption work?
Many farmers rent out their property or enter crop share agreements upon retirement. That means they either rent out the land per acre, or they form an agreement with tenants to divide the proceeds from crops.
The retired farmer’s income from cash rent or crop sharing will be tax-free beginning in tax year 2023. This applies even to retired farmers who move out of state but rent land in Iowa, as they will still be required to file state taxes here.
One major caveat: Hein said the exemption applies only to individual farmers. Farmers that operate as C corporations, partnerships, LLCs or other ownership structures may not claim the new exemption on farm lease incomes.
“Basically, you have to be an individual farming as an individual to qualify at this time,” he said.
Hein anticipates the Legislature may change the requirements in future sessions.
Due to that restriction, fewer farmers will qualify for the exemption. A nonpartisan analysis of the bill predicts about 1,300 filers would qualify for the tax exemption each year. That means about $2.1 million less in taxes going to the state in 2024.
Who is eligible for the farm lease exemption?
To claim the farm lease exemption, individuals must be all of the following:
• Retired farmers over 55
• Held the property for 10 years or more
• “Materially participated” in farming business for 10 years or more
• No longer materially participates in farming
Taxpayers may not claim the Beginning Farmer Tax Credit and the farm lease exemption in the same year. Individuals must also choose between the farm lease exemption and the capital gains extension.
How does the capital gains exemption work for retired farmers?
If a farmer chooses to sell off their property and livestock, rather than rent it out, the individual would be eligible for a capital gains tax exemption. The exemption applies to the sale of property, cattle, horses and breeding livestock.
Individuals may not claim both the capital gains exemption and the farm lease exemption.
A nonpartisan analysis of the bill predicted the farm lease exemption would be more popular than the capital gains exemption. Hein explained that, for many family farms, it’s more cost-effective for a retired farmer to rent the land to the next generation, then leave it to them in a will.
“If my ultimate goal… is to keep it in the family and keep the next generation in the farming operation, I more than likely would rent it to my son or to whoever and take the cash rent as income,” Hein said.
The Legislative Services Agency estimated the farm capital gains tax exemption will cost the state an estimated $7.2 million in fiscal year 2024.