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.
Jan. 19, 2009.