Exclusion of gain from sale of certain farmland

(a)

In general

Part III of subchapter B of chapter 1 of the Internal Revenue Code of 1986 (relating to items specifically excluded from gross income) is amended by adding after section 121 the following new section:

121A.

Exclusion of gain from sale of qualified farm property

(a)

Exclusion

In the case of a natural person, gross income shall not include— (1)100 percent of the gain from the sale or exchange of qualified farm property to a first-time farmer who meets the certification requirement of subsection (d), (2)50 percent of the gain from the sale or exchange of qualified farm property to any other person who meets the certification requirement of subsection (d), and (3)25 percent of the gain from the sale or exchange of qualified farm property to any other person for any other use. (b)

Limitation on amount of exclusion

(1)

In general

The amount of gain excluded from gross income under subsection (a) with respect to any taxable year shall not exceed $500,000 ($250,000 in the case of a married individual filing a separate return), reduced by the aggregate amount of gain excluded under subsection (a) for all preceding taxable years. (2)

Special rule for joint returns

The amount of the exclusion under subsection (a) on a joint return for any taxable year shall be allocated equally between the spouses for purposes of applying the limitation under paragraph (1) for any succeeding taxable year. (c)

Definitions

For purposes of this section— (1)

First-time farmer

The term first-time farmer means a first-time farmer (as defined in section 147(c)(2)(C), determined without regard to clause (i)(II) thereof) who meets the requirements of section 147(c)(2)(B). For purposes of the preceding sentence, in applying clause (ii) of section 147(c)(2)(B), the material and substantial participation standard shall be treated as met with respect to a qualified farm if the first-time farmer will— (A)perform not less than 1,000 hours of service with respect to such farm, or (B)provide half the required management and labor with respect to such farm. (2)

Qualified farm property

The term qualified farm property means real property located in the United States if— (A)during periods aggregating 3 years or more of the 5-year period ending on the date of the sale or exchange of such real property, such real property was used as a farm for farming purposes by the taxpayer, the taxpayer’s spouse, or other member of the family of the taxpayer, and (B)there was material participation by the taxpayer, the taxpayer’s spouse, or other member of the family of the taxpayer in the operation of the farm during 3 years or more of the 5-year period ending on the earlier of— (i)the sale or exchange of such real property, or (ii)the later of the retirement of the taxpayer or the taxpayer’s spouse who materially participated. (3)

Other definitions

The terms member of the family, farm, farming purposes, and material participation have the respective meanings given such terms by paragraphs (2), (4), (5), and (6) of section 2032A(e), respectively. (d)

Use certification as farm for farming purposes

The certification requirement of this subsection is a certification that the use of the qualified farm property referred to in subsection (a)(1) will be as a farm for farming purposes for not less than the 10-year period beginning on the date of the sale or exchange referred to in subsection (a)(1). (e)

Special rules

For purposes of this section, the following rules shall apply: (1)Rules similar to the rules of subsections (e) and (f) of section 121. (2)Rules similar to the rules of paragraphs (4) and (5) of section 2032A(b) and paragraph (3) of section 2032A(e). (f)

Treatment of disposition or change in use of property

(1)

In general

If, as of the close of any taxable year, there is a recapture event with respect to any qualified farm property transferred to the taxpayer in a sale or exchange described in paragraph (1) or (2) of subsection (a), then the tax of the taxpayer under this chapter for such taxable year shall be increased by an amount equal to the product of— (A)the applicable recapture percentage, and (B)10 percent of the taxpayer’s adjusted basis in the property on the date such property was transferred to the taxpayer. (2)

Applicable recapture percentage

(A)

In general

For purposes of this subsection, the applicable recapture percentage shall be determined from the following table: The applicable recapture If the recapture event occurs in:percentage is: Years 1 through 5100 Year 680 Year 760 Year 840 Year 920 Years 10 and thereafter0.

(B)

Years

For purposes of subparagraph (A), year 1 shall begin on the date of the sale or exchange described in paragraph (1) or (2) of subsection (a). (3)

Recapture event defined

For purposes of this subsection, the term recapture event means— (A)

Cessation of operation

The cessation of the operation of any property the sale or exchange of which to the taxpayer is described in paragraph (1) or (2) of subsection (a) as a farm for farming purposes. (B)

Change in ownership

(i)

In general

Except as provided in clause (ii), the disposition of a taxpayer’s interest in any property the sale or exchange of which to the taxpayer is described in paragraph (1) or (2) of subsection (a). (ii)

Agreement to assume recapture liability

Clause (i) shall not apply if the person acquiring such interest in the property agrees in writing to assume the recapture liability of the person disposing of such interest in effect immediately before such disposition. In the event of such an assumption, the person acquiring the interest in the property shall be treated as the taxpayer for purposes of assessing any recapture liability (computed as if there had been no change in ownership). (4)

Special rules

(A)

No credits against tax

Any increase in tax under this subsection shall not be treated as a tax imposed by this chapter for purposes of determining the amount of any credit under subpart A, B, or D of this part. (B)

No recapture by reason of hardship

The increase in tax under this subsection shall not apply to any disposition of property or cessation of the operation of any property as a farm for farming purposes by reason of any hardship as determined by the Secretary.

(b)

Conforming amendment

The table of sections for part III of subchapter B of chapter 1 of the Internal Revenue Code of 1986 is amended by adding after the item relating to section 121 the following new item:

Sec. 121A. Exclusion of gain from sale of qualified farm property.

(c)

Effective date

The amendment made by this section shall apply to any sale or exchange on or after the date of the enactment of this Act, in taxable years ending after such date.