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Iowa Capital Gain Deduction for Certain Business/Farm Assets/ESOP Stock Only

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Line: 
23
Step: 
Step 6
Step Subject: 
Adjustments to Income
Year: 
2016

This is a deduction of qualifying net capital gain realized in 2016. Note: Line 23 can be more than the net total reported on Schedule D. Unrelated losses are not to be included in the computation of the deduction. An example of an unrelated loss is the sale of common stock at a loss.

The Iowa capital gain deduction is subject to review by the Iowa Department of Revenue (Department). The deduction must be reported on one of six forms:

  • To claim a deduction for capital gains from the qualifying sale of cattle, horses, or breeding livestock, complete the IA 100A.
  • To claim a deduction for capital gains from the qualifying sale of real property used in a farm business, complete the IA 100B.
  • To claim a deduction for capital gains from the qualifying sale of real property used in a non-farm business, complete the IA 100C.
  • To claim a deduction for capital gains from the qualifying sale of timber, complete the IA 100D.
  • To claim a deduction for capital gains from the qualifying sale of a business, complete the IA 100E.
  • To claim a deduction for capital gains from the qualifying sale of employer securities to a qualified Iowa employee stock ownership plan (ESOP), complete the IA 100F.

This completed form must be included with the IA 1040 to support the Iowa capital gain deduction. The Department will use this form to verify that the taxpayer qualifies for the deduction. The Department may request additional information if needed.

Complete a separate IA 100B-100F for each distinct property sale, although multiple livestock sales can, in some instances, be reported on one IA 100A (see IA 100A instructions). Complete the applicable form each year of a qualifying installment sale. Complete the applicable form even if the gain was passed-through from a separate entity.

The sale of assets by a C corporation does not qualify for the Iowa capital gain deduction. However, the gain from a corporate liquidation under Internal Revenue Code (IRC) section 331 may qualify for the Iowa capital gain deduction.

For taxpayers filing separately on the same return, each spouse must complete the appropriate IA 100 form for the Iowa capital gain deduction claimed based on the spouse’s ownership share in the property.

For more information on the Iowa capital gain deduction, see the instructions for the respective IA 100 form, Iowa Administrative Code 40.38, and the Capital Gain Flowcharts.

Eligible Property Sales

The Iowa capital gain deduction is available for the net capital gain from qualifying sales of the following properties:

a. Cattle, Horses, and Breeding Livestock

A taxpayer may deduct the net capital gain from the sale of cattle and horses used for breeding, draft, dairy, or sporting purposes and held for at least 24 months. A taxpayer also may deduct the net capital gain from the sale of other livestock used for breeding purposes and held for at least 12 months. To qualify for the deduction, the taxpayer must receive greater than 50% of his or her gross income from farming and ranching in the tax year. However, the sale of qualifying livestock to a lineal descendant of the taxpayer eliminates the requirement to have in excess of 50% of gross income from farming and ranching.

b. Real Property Used in a Farm Business

A taxpayer may deduct the net capital gain from the sale of real property used in a farm business and held for at least 10 years. Additionally, the taxpayer must materially participate in the farm business. Typically, the taxpayer must materially participate in the farm business for the 10 years prior to the sale. Alternatively, a retired or disabled farmer may qualify by materially participating in the farm business for five of the eight years prior to retirement or disability.

c. Real Property Used in a Non-Farm Business

A taxpayer may deduct the net capital gain from the sale of real property used in a business and held for at least 10 years. Additionally, the taxpayer must materially participate in the business, typically for the 10 years prior to the sale.

d. Timber

A taxpayer may deduct the net capital gain from the sale of timber held for at least 12 months. “Timber” means timber that qualifies for capital gain treatment under section 1231 of the Internal Revenue Code. Timber includes evergreen trees, such as Christmas trees, that are more than six years old at the time they are cut and sold for ornamental purposes.

e. Business

A taxpayer may deduct the net capital gain from the sale of a business held for at least 10 years. The sale of a business means the sale of all or substantially all of the tangible personal property or service of the business which is intangible personal property such as client lists, goodwill, patents, trade names, and similar items. This means that the sale of the assets of a business during the tax year must represent at least 90% of the fair market value of all of the tangible personal property of the business on the date of sale of the business assets. Additionally, the taxpayer must materially participate in the business, typically for the 10 years prior to the sale. However, the sale of a business to a lineal descendent of the taxpayer eliminates the requirement for material participation in the business.

f. ESOP

A taxpayer may deduct 50% of the net capital gain from the sale of exchange of employer securities of an Iowa corporation to a qualified Iowa ESOP. To be eligible, the Iowa ESOP must own at least 30% of all outstanding employer securities issued by the Iowa corporation after completion of the transaction.

Non-Qualifying Capital Gain Sales

Capital gains from sales of the following properties typically do not qualify for the Iowa capital gain deduction:

  • Investment property, such as real property held for speculation but not used in a business
  • Bonds and stocks, other than a qualifying sale of employer securities of an Iowa corporation to an Iowa ESOP
  • Ownership interests and capital stock in a business, other than a qualifying sale of employer securities of an Iowa corporation to an Iowa ESOP
  • Merchandise and inventory of a business

Installment Sales

In the case of installment sales of qualifying property, only installments received in the 2016 tax year qualify for the capital gain deduction on the 2016 return. Eligibility for the deduction is determined at the time of the installment sale. Accrual-method taxpayers: See instructions for line 14 of the IA 1040.

Net Operating Losses

For tax years beginning on or after January 1, 1998, the capital gain deduction otherwise allowable is not allowed in computing a net operating loss (NOL) deduction for purposes of carrying the net operating loss deduction to another tax year. Further, when applying an NOL from tax year 1998 or later, the capital gain deduction is not allowed in the carryback or carryover tax year and must be added back to that year’s income to the extent of the NOL.

 

Married Separate Filers:

Divide the capital gain deduction based on ownership of the asset.

a. Jointly held: Divide equally between spouses.

b. If other than jointly held: Divide between spouses based on percentage of ownership. (Examples of how to prorate)

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