Deciding what to do with the family farm when you retire is not something that should be taken lightly. There are several options and each of them has its own complications and tax implications. In fact, every farmer should start to weigh their options and begin to make retirement plans years in advance of the big day.
One option for Canadian farmers is an intergenerational farm rollover that allows them to transfer ownership of their farm to their spouse or children at cost, thus avoiding taxes on capital gains. However, it’s important to be aware of the rules for qualifying farm properties before you make the transfer otherwise you or your dependents could be left with a hefty tax bill.
When you transfer your farm over to your children or spouse, no taxes have to be paid on the capital gains until they sell the farm. Since each of your children is entitled to a $800,000 capital gains exemption on a qualifying farm property, they could dramatically reduce or even eliminate any of the taxes that would otherwise be payable on the sale of the farm.
In order to be eligible for the capital gains exemption, the farm must meet certain qualifications. At the time that you roll your farm over to your children or upon your death, its principle use must be the business of farming. If you rent out your farm and take a share of the crop, it could be considered to be rental income and not farm income and you could lose the capital gains exemption.
There are several rules that a farm must meet before it can be transferred as an intergenerational rollover. That’s why it’s important to consult with someone who’s well versed in the complexities of farm transfers long before you retire.
Fred Mertz of Farming Families is an accountant and realtor who knows the ins and outs of farm transfers. Let him help you to negotiate the sometimes muddy waters of farm succession planning and avoid a big tax bill down the road.
By Fred Mertz Join me on Google+