Sale of a personal residence, alone or as part of a farm sale, offers some unique opportunities for postponing or avoiding income taxes. Residences may receive special income tax treatment even when they are sold as part of a farm or other business.
People selling farms usually are selling many different assets. Some assets qualify for special tax treatments by the seller or the buyer. It is desirable for the buyer and seller to agree on the value of assets such as fence, tile, buildings, wells, rental homes, personal residence, land, machinery, etc. If values aren't in the sales contract then the parties must estimate their own.
The seller usually wants to place as much of the value as possible on the personal residence in an attempt to get the most tax benefit. Buyers usually want to set a high value on the farm buildings and other depreciable assets so they can take more depreciation.
Buyers and sellers trying to set values after the sale usually use property tax appraisals to help estimate values. For example, if the property tax appraisal attributed twenty percent of a property's value to the personal residence the seller might attribute twenty percent of the sales price to the personal residence.
One frequent question is, "How much land can we include with the residence?" There isn't a specific number of acres. Usually it's the area surrounding the house that is fenced in or mowed for personal use.
Persons at least 55 years old are allowed a limited one-time exclusion of the first $125,000 of gain on the sale of a personal residence. One spouse may be under 55 as long as the other spouse is at least 55 years old. At least one of them must have used the property as a principal residence for at least three-years during the five-year period ending on the date of sale. A person is eligible if he or she (or the person's spouse) did not previously elect the exclusion.
You don't have to use this exclusion unless you want to. Some may want to save it for possible later use. There are other details related to this exclusion that go beyond this text. (See Department of the Treasury, Internal Revenue Service, Publication 523, "Selling Your Home.")
Usually you can avoid taxes on gain from the sale of a principal residence, by buying another one of equal or higher value, within two years of selling the old one. Usually there are adjustments to the sales price of the old residence and the purchase price of the new one before computing the gain, if any. Keep closing statements as a record of expenses, disbursements and adjustments made at closing. Check current law for particular requirements.
If a home is involuntarily converted (stolen, destroyed by accident, or seized in condemnation proceedings), the insurance proceeds or condemnation award isn't taxable when all the proceeds are invested in another residence within prescribed time limits. It is also possible to trade your home for another of equal or higher value - tax free.