Q: My wife and I live on a 25-acre property. Approximately 10 acres are being farmed, however, I am not receiving any income from the farming because I allow a neighbor to farm it rent free.
Someone told me that because the property is the size it is and is considered farm property, we could not take the $500,000 deduction when we sell the property.
My understanding is that you can take the capital gains deduction on your primary residence as long as you live there for 2 of the previous 5 years.
A: If you live on the land as your full-time residence, no matter how big it is, my understanding is that it’s your primary property. And since you’re entitled to take to $250,000 (up to $500,000 if you’re married) in profits tax-free when you sell your primary residence, provided you’ve lived there for at least 2 of the past five years, I don’t see why you should have a problem.
For more details, consult with your tax advisor. You may also be interested in IRS Publication 523 “Selling Your Home,” which you can get for free at IRS.gov.
Published: Jan 16, 2004