23. IOWA CAPITAL GAINS DEDUCTION.
This is a deduction of qualifying net capital gains realized
in 2006. Note: Line 23 can be more than
the net total reported on Schedule D. Unrelated losses are not to
be included in the computation of the deduction. An example of an unrelated
loss is the sale of common stock at a loss.
Lineal descendant means children
of the taxpayer, including legally adopted children and biological
children, stepchildren, grandchildren, great-grandchildren and any
other lineal descendants of the taxpayer.
For Sales Before 2006: In determining the 10-year
holding period for eligibility for the Iowa capital gains deduction,
the asset being sold had to be owned by the taxpayer for the immediately
preceding 10 years to qualify for the deduction. In cases involving
like-kind exchanges, inherited property or gifted property, the time
period that the assets were owned may be different than the holding period
determined for federal income tax purposes.
For Sales in 2006 and subsequent years: In determining the 10-year holding
period for eligibility for the Iowa capital gains deduction, the federal
holding period provisions set forth in section 1223 of the Internal
Revenue Code and regulations adopted by the Internal Revenue Service
will be used.
Material participation - Iowa
follows Federal guidelines for determining material
participation for purposes of the capital gains deduction.
Determining material participation
can be a complex issue.
For further examples in addition to those below see Iowa Administrative Code 40.38
The following are only a limited sampling of individuals in specific types of activities that may
have unique problems or circumstances related to material participation
in a business:
1. Limited partners of a limited partnership. The limited partners
will not be treated as materially participating in any activity of
a limited partnership except in a situation where the limited partner
would be treated as materially participating under the material participation
2. Work not customarily done by owners. Work done in connection with
an activity shall not be treated as participation in the activity if
both of the following apply:
Such work is not of a type that is customarily done by an owner of such
One of the principal purposes for the performance of such work is to
avoid the disallowance of any loss or credit from such activity.
3. Participation in a business by an investor. Work done by an individual
in the individual's capacity as an investor in an activity is not considered
to be material participation in the business or activity unless the investor
is directly involved in the day-to-day management or operations of the
activity or business.
4. Cash farm lease. A farmer who rents farmland on a cash basis will
not generally be considered to be materially participating in the farming
activity. The burden is on the landlord to show there was material
participation in the cash–rent farm activity.
5. Farm landlord involved in crop-share arrangement. A farm
landlord is subject to self–employment tax on net income from a crop–share
arrangement with a tenant. The landlord is considered to be materially
participating with the tenant in the crop–share activity if the landlord
meets one of the four following tests:
TEST 1.The landlord does any three of the following: (1) Pay or be obligated
to pay for at least half the direct costs of producing the crop; (2)
Furnish at least half the tools, equipment, and livestock used in producing
the crop; (3) Consult with the tenant; and (4) Inspect the production
TEST 2.The landlord regularly and frequently makes, or takes part in
making, management decisions substantially contributing to or affecting
the success of the enterprise.
TEST 3.The landlord worked 100 hours or more spread over a period of
five weeks or more in activities connected with crop production.
TEST 4.The landlord has done tasks or performed duties which, considered
in their total effect, show that the landlord was materially and significantly
involved in the production of the farm commodities.
6. Conservation reserve payments. Farmers entering into long-term
contracts providing for less intensive use of highly erodible or other
specified cropland can receive compensation for conversion of such
land in the form of an “annualized rental payment.” Although the CRP
payments are referred to as “rental payments,” the payments are considered
to be receipts from farm operations and not rental payments from real
If an individual is receiving CRP payments and is not considered to
be retired from farming, the CRP payments are subject to self-employment
tax. If individuals actively manage farmland placed in the CRP program
by directly participating in seeding, mowing, and planting the farmland
or by overseeing these activities, the owner will be considered to
have had material participation in the farming activity.
7. Rental activities or businesses. The general rule is that a taxpayer
who actively participates in a rental activity or business which would
be considered to have been material participation in another business
or activity would be deemed to have had material participation in the
rental activity unless covered by a specific exception. For example,
the exceptions for farm rental activities in numbered paragraphs "4," "5," and "6" immediately
above. Rental activity or rental business has the same meaning as the term is used in
Section 469(c) of the Internal Revenue Code.
EXAMPLE. Ryan Stanley is an attorney who has owned two duplex units
since 1991 and has received rental income from these duplexes since 1991.
Mr. Stanley is responsible for the maintenance of the duplexes and may
hire other individuals to perform repairs and other upkeep on the duplexes.
However, no person spends more time in maintaining the duplexes than
Mr. Stanley. The duplexes are sold in 2004, resulting in a capital gain.
Mr. Stanley can claim the capital gain deduction on the 2004 Iowa return
since he met the material participation requirements for this rental
capital gains result from the sale of the following:
- Real property used in a business in which the taxpayer
materially participated for 10 years prior to the sale, and which
has been held for a minimum of 10 years immediately prior to its
- A business in which the taxpayer was employed or in
which the taxpayer materially participated for 10 years
and which has been held for a minimum of 10 years immediately prior
to its sale. The sale of a business means the sale of all or substantially
all of the tangible personal property or service of the business
which is intangible personal property such as client lists,
goodwill, patents, trade names, and similar items. This means that
the sale of the assets of a business during the tax year must represent
at least 90% of the fair market value of all of the tangible personal
property of the business on the date of sale of the business
assets. Sale to an individual who is a lineal
descendent of the taxpayer eliminates the requirement for material
- Cattle and horses used for breeding, draft, dairy
or sporting purposes and held for 24 months by the taxpayer
who received in excess of 50% of his or her gross income from farming
and ranching. Sale to an individual who is
a lineal descendent of the taxpayer eliminates the requirement
to have in excess of 50% of gross income from farming and ranching.
- Breeding livestock, other than cattle and horses,
held for 12 months by the taxpayer who received in
excess of 50% of his or her gross income from farming or ranching. Sale
to an individual who is a lineal descendent of the taxpayer
eliminates the requirement to have in excess of 50% of gross
income from farming and ranching. Note: The
cattle, horses, and other livestock that are excluded from
taxation are the sales of the same classes of livestock that
qualify for capital gain treatment under section 1231 of the
Internal Revenue Code.
- Timber held by the taxpayer for more than
one year. Timber includes evergreen trees, such as Christmas
trees, that are more than six years old at the time they
are cut and sold for ornamental purposes. Timber means
timber that qualifies for capital gain treatment under section
1231 of the Internal Revenue Code.
The sales of items a through e by
partnerships, subchapter S corporations and LLCs, where the capital
gains flow through to the owners of the entities for Federal income
tax purposes are eligible for the 100% capital gains deduction in
cases where the owners meet the qualifications for ownership and
material participation. However, sales of the same items by a C corporation
do not qualify for the capital gains deduction except when the capital
gains from the sales of the corporations assets are reported
by the shareholders due to a liquidation of the corporation. The
liquidation must be recognized as a sale of assets under section
331 of the Internal Revenue Code. The shareholders must meet the
qualifications for ownership and material participation.
Capital gains from the sales of stocks, bonds, and
investment property do not qualify for the capital gain deduction
even if sold to lineal descendants of the owners of the property.
Non-farm rental property may qualify. The Federal guideline applies
for determining material participation for investment property.
Capital gains from the sale of real property held for 10 or more
years for speculation, but not used in a business, do not qualify
for the deduction.
If the sale of the assets of a business involves
the sale of merchandise or inventory of a business, proceeds from
these sales do not qualify for the capital gains deduction.
Capital gains from the sale of capital stock of an
Iowa corporation or capital gains from the sale of an ownership
interest in a partnership, limited liability company, or other
business entity do not constitute a qualifying sale of a business
for purposes of the capital gains deduction.
In the case
of installment sales of qualified real property and installment sales
of businesses where the selling price of the business assets is paid
to the seller in more than one year, only installments received in
the 2006 tax year qualify for this deduction on the 2006 return.
In the case of an installment sale of a business which was made in a year prior to 1998, only installments received in 1998 or in subsequent tax years will be exempt from income tax in cases where the taxpayer at the time of the installment sale had met conditions that would exempt the net capital gain from tax, if the installment sale had occurred in 1998 or later. Accrual-method taxpayers: See instructions for line14 of the IA 1040.
Net Operating Losses.
For tax years beginning on or after January 1, 1998,
the capital gain deduction otherwise allowable is not allowed in computing
a net operating loss (NOL) deduction for purposes of carrying the net operating
loss deduction to another tax year. Further, when applying an NOL from
tax year 1998 or later, the capital gain deduction is not allowed in
the carryback or carryover tax year and must be added back to that
years income to the extent of the NOL.
MARRIED SEPARATE FILERS: Divide the capital gain deduction based on ownership of the asset.
- Jointly held: Divide equally between spouses.
- If other than jointly held: Divide between spouses based on percentage of ownership. (Examples of how to prorate)
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