January 2018

January 2018

How Does the New Tax Law Impact Equipment Trades?

The Tax Cuts and Jobs Act preserved like-kind exchange treatment for real property, but eliminated it for personal property. Today, we take an initial look at what that means for farmers or other taxpayers looking to trade equipment or livestock in 2018.  

Pre-Tax Cuts and Jobs Act Law

Under 2017 law, IRC § 1031 non-recognition treatment was mandatory for a qualifying exchange of personal property. Those who did not want to apply §1031 like-kind exchange rules to a trade typically had to structure the transaction as a clear sale and purchase to avoid being automatically deemed a like-kind exchange by IRS and the courts. Taxpayers could generally accomplish this by selling the old asset to a different party than the one from whom the new asset was purchased. With a §1031 exchange, gains or losses on the exchange of like-kind personal property used in a trade or business were generally deferred.  This meant that if a farmer traded a fully depreciated piece of equipment for a newer model, the like-kind exchange rules applied, and recognition of IRC § 1245 recapture was deferred. If a farmer traded several raised breeding heifers for some like-kind cows, § 1231 gain would be deferred on that transaction as well. In a like-kind exchange, the basis of the relinquished property was carried over to the basis of the replacement property, and gain recognition was rolled ahead until such time as the replacement property was sold.

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Water Quality Funding Bill Awaits Governor Reynolds' Signature

On January 23, 2018, the Iowa House finished work that was started last year by the Iowa Senate by passing a new water quality funding bill by a vote of 59-41. SF 512, which was passed by the Iowa Senate last April, is now awaiting the signature of Governor Reynolds. She has publicly supported the legislation and has stated that she will announce a signing ceremony “at a later date.” The legislation provides $282 million over 12 years to fund edge-of-field and in-field infrastructure projects designed to meet Iowa Nutrient Reduction Strategy goals, as well as to fund projects to improve the quality of Iowa’s surface water, ground water, and drinking water.

Initial Source of Funds

SF 512 initiates its funding stream by exempting from state sales tax the sale of metered water by utilities and instead creating a new Water Service Excise Tax. This money, collected by the Iowa Department of Revenue, would be deposited into the general fund, through fiscal year 2030. The excise tax will be repealed on July 1, 2029, or any time before that if the state increases its sales tax. Money from the excise tax will be used to create two new funds, beginning in fiscal year 2019, a Water Quality Infrastructure Fund and a Water Quality Financial Assistance Fund. 

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Partition in Kind Receives Another Blow from the Iowa Supreme Court

Iowa law has been clear, and it is perhaps even more clear today. Unlike most other states, Iowa is “unequivocal in favoring partition by sale." Newhall v. Roll, 888 N.W.2d 636, 640 (Iowa 2016). In December of 2016, the Iowa Supreme Court issued an opinion reversing a partion in kind and ordering the property sold. In Newhall, the Court reviewed Iowa law, stating that under Iowa R. Civ. P. 1.1201(2), the party seeking a partition in kind has the burden to prove it would be both equitable and practicable. In Newhall, the Court ruled that an in-kind partition of a family farm requested by a sister would not be practicable or equitable. Specifically, the Court ruled that the sister's proposed in-kind division had to be rejected "because the division into separate parcels would depreciate their aggregate value. On January 12, 2018, the Court relied on Newhall to reverse another partition in kind that had been ordered by the Iowa Court of Appeals

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