Other Gains(p59)

This section discusses gain on the disposition of farmland for which you were allowed either of the following.

• Deductions for soil and water conservation expenditures (section 1252 property).
• Exclusions from income for certain cost sharing payments (section 1255 property).

If you disposed of farmland you held more than 1 year and less than 10 years at a gain and you were allowed deductions for soil and water conservation expenses for the land, as discussed in chapter 5, you must treat part of the gain as ordinary income and treat the balance as section 1231 gain.

Do not treat gain on the following transactions as gain on section 1252 property.

• Disposition of farmland by gift.
• Transfer of farm property at death (except for income in respect of a decedent).

For more information, see Regulations section 1.1252-2.

You report as ordinary income the lesser of the following amounts.

• Your gain (determined by subtracting the adjusted basis from the amount realized from a sale, exchange, or involuntary conversion, or the FMV for all other dispositions).
• The total deductions allowed for soil and water conservation expenses multiplied by the applicable percentage, discussed next.

The applicable percentage is based on the length of time you held the land. If you dispose of your farmland within 5 years after the date you acquired it, the percentage is 100%. If you dispose of the land within the 6th through 9th year after you acquired it, the applicable percentage is reduced by 20% a year for each year or part of a year you hold the land after the 5th year. If you dispose of the land 10 or more years after you acquired it, the percentage is 0%, and the entire gain is a section 1231 gain.

You acquired farmland on January 19, 2002. On October 3, 2010, you sold the land at a $30,000 gain. Between January 1 and October 3, 2010, you incur soil and water conservation expenditures of $15,000 for the land that are fully deductible in 2010. The applicable percentage is 40% since you sold the land within the 8th year after you acquired it. You treat $6,000 (40% of $15,000) of the $30,000 gain as ordinary income and the $24,000 balance as a section 1231 gain.

If you receive certain cost-sharing payments on property and you exclude those payments from income (as discussed in chapter 3), you may have to treat part of any gain as ordinary income and treat the balance as a section 1231 gain. If you chose not to exclude these payments, you will not have to recognize ordinary income under this provision.

You report as ordinary income the lesser of the following amounts.

• The applicable percentage of the total excluded cost-sharing payments.
• The gain on the disposition of the property.

You do not report ordinary income under this rule to the extent the gain is recognized as ordinary income under sections 1231 through 1254, 1256, and 1257. However, you do report as ordinary income under this rule a gain or a part of a gain regardless of any contrary provisions (including nonrecognition provisions) under any other section.

The applicable percentage of the excluded cost-sharing payments to be reported as ordinary income is based on the length of time you hold the property after receiving the payments. If the property is held less than 10 years after you receive the payments, the percentage is 100%. After 10 years, the percentage is reduced by 10% a year, or part of a year, until the rate is 0%.

Use Form 4797, Part III, to figure the ordinary income part of a gain from the sale, exchange, or involuntary conversion of section 1252 property and section 1255 property.