23. IOWA CAPITAL GAIN DEDUCTION.
This is a deduction of qualifying
net capital gain realized in 2009. 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.
Lineal descendant means
children of the taxpayer, including legally-adopted children, biological
children, stepchildren, grandchildren, great-grandchildren, and any
other lineal descendants of the taxpayer.
For Sales Before 2006: In
determining the 10-year holding period for eligibility for the Iowa
capital gain deduction, the asset being sold had to be owned by the
taxpayer for the immediately preceding 10 years to qualify for the
deduction. In cases involving like-kind exchanges, inherited property,
or gifted property, the time period that the assets were owned may
be different than the holding period determined for federal income
For Sales in 2006 and
subsequent years: In determining the 10-year holding
period for eligibility for the Iowa capital gain deduction, the federal
holding period provisions set forth in section 1223 of the Internal
Revenue Code and regulations adopted by the Internal Revenue Service
will be used.
Material participation - Iowa
follows federal guidelines for determining material
participation for purposes of the capital gain deduction.
Determining material participation
can be a complex issue.
For further examples in addition to those below see Iowa Administrative Code 40.38
The following are only a limited sampling of individuals in specific types of activities that may
have unique problems or circumstances related to material participation
in a business:
1. Limited partners of a limited partnership. The limited partners
will not be treated as materially participating in any activity of
a limited partnership except in a situation where the limited partner
would be treated as materially participating under the material participation
2. Work not customarily
done by owners. Work
done in connection with an activity is not treated as participation
in the activity if both of the following apply:
Such work is not of a type that is customarily done by an owner of such
One of the principal purposes for the performance of such work is to
avoid the disallowance of any loss or credit from such activity.
3. Participation in a business by an investor. Work done by an individual
in the individual's capacity as an investor in an activity is not considered
to be material participation in the business or activity unless the investor
is directly involved in the day-to-day management or operations of the
activity or business.
4. Cash farm lease. A farmer who rents farmland on a cash basis will
not generally be considered to be materially participating in the farming
activity. The burden is on the landlord to show there was material
participation in the cash-rent farm activity.
5. Farm landlord involved in crop-share arrangement. A farm
landlord is subject to self-employment tax on net income from a crop-share
arrangement with a tenant. The landlord is considered to be materially
participating with the tenant in the crop-share activity if the landlord
meets one of the four following tests:
TEST 1.The landlord does any three of the following: (1) Pay or be obligated
to pay for at least half the direct costs of producing the crop; (2)
Furnish at least half the tools, equipment, and livestock used in producing
the crop; (3) Consult with the tenant; and (4) Inspect the production
TEST 2.The landlord regularly and frequently makes, or takes part in
making, management decisions substantially contributing to or affecting
the success of the enterprise.
TEST 3.The landlord worked 100 hours or more spread over a period of
five weeks or more in activities connected with crop production.
TEST 4.The landlord has done tasks or performed duties which, considered
in their total effect, show that the landlord was materially and significantly
involved in the production of the farm commodities.
6. Conservation reserve payments. Farmers
entering into long-term contracts providing for less intensive use
of highly erodible or other specified cropland can receive compensation
for conversion of such land in the form of an "annualized rental payment." Although the CRP
payments are referred to as "rental payments," the payments are considered
to be receipts from farm operations and not rental payments from real
If an individual is receiving CRP payments and is not considered to
be retired from farming, the CRP payments are subject to self-employment
tax. If individuals actively manage farmland placed in the CRP program
by directly participating in seeding, mowing, and planting the farmland
or by overseeing these activities, the owner will be considered to
have had material participation in the farming activity.
7. Rental activities or businesses. The
general rule is that a taxpayer who actively participates in a rental
activity or business which would be considered to have been material
participation in another business or activity would be deemed to
have had material participation in the rental activity unless covered
by a specific exception. For example, the exceptions for farm rental
activities in numbered paragraphs "4," "5," and "6" immediately
above. Rental activity or rental business has the same meaning as the
term is used in section 469(c) of the Internal Revenue Code.
EXAMPLE. Ryan Stanley is
an attorney who has owned two duplex units since 1991 and has received
rental income from these duplexes since 1991. Mr. Stanley is responsible
for the maintenance of the duplexes and may hire other individuals
to perform repairs and other upkeep on the duplexes. However, no
person spends more time in maintaining the duplexes than Mr. Stanley.
The duplexes are sold in 2009, resulting in a capital gain. Mr. Stanley
can claim the capital gain deduction on the 2009 Iowa return since
he met the material participation requirements for this rental activity.
capital gain result from the sale of the following:
- Real property used in a business in which the taxpayer
materially participated for 10 years prior to the sale, and which
has been held for a minimum of 10 years immediately prior to its
- A business in which the
taxpayer was employed or in which the taxpayer materially participated
for 10 years and which has been held for a minimum of 10 years immediately
prior to its sale. 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. Sale to an individual who is a lineal
descendent of the taxpayer eliminates the requirement for material
- Cattle and horses used
for breeding, draft, dairy, or sporting purposes and held for 24
months by the taxpayer who received in excess of 50% of his or
her gross income from farming and ranching. Sale to an individual
who is a lineal descendent of the taxpayer eliminates the requirement
to have in excess of 50% of gross income from farming and ranching.
- Breeding livestock,
other than cattle and horses, held for 12 months by the taxpayer
who received in excess of 50% of his or her gross income from
farming or ranching. Sale to an individual who is a lineal
descendent of the taxpayer eliminates the requirement to have
in excess of 50% of gross income from farming and ranching. Note: The
cattle, horses, and other livestock that are excluded from
taxation are the sales of the same classes of livestock that
qualify for capital gain treatment under section 1231 of the
Internal Revenue Code.
- Timber held by
the taxpayer for more than one year. 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. Timber means
timber that qualifies for capital gain treatment under section
1231 of the Internal Revenue Code.
The sales of items a through e by
partnerships, subchapter S corporations, and LLCs, where
the capital gain flows through to the owners of the entities
for federal income tax purposes are eligible for the 100% capital
gain deduction in cases where the owners meet the qualifications
for ownership and material participation. However, sales of the
same items by a C corporation do not qualify for the capital
gain deduction except when the capital gain from the sales
of the corporations assets are reported
by the shareholders due to a liquidation of the corporation.
The liquidation must be recognized as a sale of assets under
section 331 of the Internal Revenue Code. The shareholders must
meet the qualifications for ownership and material participation.
Capital gain from the sales
of stocks, bonds, and investment property does not qualify for the capital
gain deduction even if sold to lineal descendants of the owners of
the property. Non-farm rental property may qualify. The federal guidelines
apply for determining material participation for investment property.
Capital gain from the sale of real property held for 10 or more
years for speculation, but not used in a business, does not qualify
for the deduction.
If the sale of the assets
of a business involves the sale of merchandise or inventory of a business,
proceeds from these sales do not qualify for the capital gain deduction.
Capital gain from the sale
of capital stock of an Iowa corporation or capital gain from the sale
of an ownership interest in a partnership, limited liability company,
or other business entity does not constitute a qualifying sale of a business
for purposes of the capital gain deduction.
In the case
of installment sales of qualified real property and installment sales
of businesses where the selling price of the business assets is paid
to the seller in more than one year, only installments received in
the 2009 tax year qualify for this deduction on the 2009 return.
In the case of an installment sale of a business which was made in a year prior to 1998, only installments received in 1998 or in subsequent tax years will be exempt from income tax in cases where the taxpayer at the time of the installment sale had met conditions that would exempt the net capital gain from tax, if the installment sale had occurred in 1998 or later. Accrual-method taxpayers: See instructions for line14 of the IA 1040.
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 years income to the extent
of the NOL.
MARRIED SEPARATE FILERS: Divide the capital gain deduction based on ownership of the asset.
- Jointly held: Divide equally between spouses.
- If other than jointly held: Divide between spouses based on percentage of ownership. (Examples of how to prorate)
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