We’ve received a lot of questions recently involving how to treat unharvested crops at death for tax purposes. It’s a great question. We’ll develop a technical piece for TaxPlace on the topic, but here we go over the basic issues that arise and the general rules.
When an individual dies during the growing season, the tax treatment of the crop is tied to the status of the decedent at the time of death. Was the decedent a farmer? If the decedent was a landlord, what type of lease was involved? Those are the key questions.
If the decedent was a farmer or a landlord under a material participation lease, the unharvested crops should be valued at their fair market value as of the date of the decedent’s death. That’s the general rule, but it could be modified if the estate elects the alternate valuation date. That’s six months after death, but a couple of conditions have to be satisfied before an alternate valuation date election can be made for the estate. In either event, the valuation utilized also serves as the income tax basis of the unharvested crops. The value is typically determined either by an appraisal or by discounting the crop yield at harvest to the date of death taking into account risk of crop loss by natural events.
If the decedent was a passive landlord (non-material participation crop share or cash lease) the unharvested crop is valued just like it is for a deceased farmer, but the resulting gain on sale is different. Growing and stored crops of a non-farmer (the share rent portion) that were harvested and sold after death are income-in-respect-of-decedent (IRD) with respect to the portion of the sale proceeds that is allocable to the pre-death period. That means no new basis at death, even though it is included in the decedent’s gross estate. It’s treated as accrued rent. The balance of the proceeds is treated as ordinary income that the estate earned after the decedent died. You split the proceeds between IRD and ordinary income based on the number of days in the rental period up to and including the date of the decedent’s death (for the IRD portion) and the day after death to the end of the rent term (for the ordinary income portion).
So, for farmers the tax issues are more straightforward than they are for landlords. For landlords, the type of lease matters. A written lease clearly specifying the roles of the parties is helpful in determining the tax issues surrounding the landlord’s death. Also, an agent’s activity can count as the landlord’s. That means that somebody else, perhaps a family member, can provide the management necessary to convert what would otherwise be a passive lease to one that counts as material participation. That can create self-employment tax liability during life, but it can also yield tax benefits at death. To get that result, some thoughtful planning is required in advance.
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