Federal Capital Gains Tax
When you sell land for more than your basis, the difference is a capital gain. Your basis is normally what you paid for the property plus the cost of lasting improvements, such as a road, a pond or a barn, less any depreciation you have claimed.
- Held more than one year: the gain is long-term and taxed at the federal long-term rates of 0%, 15% or 20%, depending on your income.
- Held one year or less: the gain is short-term and taxed at your ordinary income rates.
- Higher earners may also owe the 3.8% federal net investment income tax on the gain.
How you came to own the land matters as much as how long you have held it:
| How you got the land | Your basis is generally |
|---|---|
| You bought it | What you paid, plus improvements |
| You inherited it | Its fair market value on the date of death |
| It was given to you during the owner's life | The giver's original basis, carried over to you |
The gap between the last two rows can be very large. A farm bought decades ago and given to a child keeps its old, low basis. The same farm inherited by that child generally gets a new basis at today's value. See our guide to selling inherited land in Tennessee.
Tennessee Does Not Tax the Gain
Tennessee has no income tax on an individual's wages or capital gains, and the old Hall tax on interest and dividends ended in 2021. For an individual selling land, the income tax on the sale is federal. Tennessee's inheritance tax was also repealed for deaths in 2016 and later.
Greenbelt Rollback Taxes
If your land is enrolled in Greenbelt, you have been paying property tax on its farm or forest use value and not on its market value. When the land stops qualifying, the county recaptures part of that saving. This is the rollback tax.
- How far back: three years for agricultural and forest land, five years for open space land.
- What triggers it: a change to a use that does not qualify, such as development; a division that leaves a tract below the minimum size; or a new owner who does not apply to continue the program.
- Who pays: Tennessee law makes the seller liable when the sale causes the disqualification, unless the written contract says otherwise. If the buyer declares in writing that they will continue the Greenbelt use and then fails to, the rollback becomes the buyer's.
- If the buyer will keep farming: a sale by itself does not trigger rollback. The buyer files a new application with the county assessor, and the deadline is March 15.
Ask the county assessor for a rollback estimate. On valuable land near a growing town, three years of rollback can be a large number. It belongs in your net-proceeds figure and in the contract, not in a surprise at the closing table.
Our article on how Greenbelt works in Tennessee explains who qualifies and how the tax is calculated.
Legal Ways to Defer or Reduce the Tax
Each of these has conditions, and all of them have to be arranged before closing.
- 1031 exchange. If the land was held for investment or used in a business, you can defer the gain by putting the proceeds into other investment or business real estate. You have 45 days after closing to identify the replacement property in writing and 180 days to close on it, and a qualified intermediary has to hold the money in between. If the proceeds reach you first, the exchange fails.
- Installment sale. If you finance part of the price for the buyer and are paid over several years, you generally report the gain as you receive the payments. That can keep you in a lower bracket, but you carry the risk that the buyer stops paying.
- The home-sale exclusion. If your main home sits on the farm, part of the gain may be excluded: up to $250,000, or $500,000 for a married couple filing jointly, when you have owned and lived in the home for at least two of the last five years. It covers the house and the land used with it as a residence, not the farmland.
- Selling in stages. Selling part of the land in one tax year and the rest in another can spread the gain across two years.
- Conservation easement. Donating a permanent conservation easement before a sale can produce an income tax deduction and lowers the land's market value. It is permanent and the rules are complicated, so it needs specialist advice.
Depreciation Comes Back
If you have claimed depreciation on barns, fencing, equipment or a rental house on the farm, the part of your gain that comes from that depreciation is taxed at higher rates than the rest. Your accountant will need your depreciation schedules to work it out.
Other Costs at Closing
- Property tax for the year of sale is normally divided between buyer and seller as of the closing date.
- Selling costs, including the commission, title and attorney fees and any survey you pay for, reduce your taxable gain.
- Liens and mortgages, including farm loans, are paid from the proceeds.
Start With Your Net Number
The useful question is what you will keep after tax, rollback and costs. Before we list a property, we prepare an estimate of the seller's net proceeds, and we encourage every seller to review it with their accountant while there is still time to plan. To see where your land stands, request a free valuation or read how we sell land in Middle Tennessee.
Common Questions
Does Tennessee tax the gain when I sell land?
No. Tennessee has no income tax on an individual's wages or capital gains. The tax on a land sale is federal. Land owned by a corporation or an LLC can be treated differently, so ask your accountant if your land is held in a company.
Who pays the Greenbelt rollback tax, the buyer or the seller?
Under Tennessee law the seller is liable when the sale causes the land to lose its Greenbelt status, unless the written contract says otherwise. If the buyer states in writing at the sale that they will continue the qualifying use and then does not, the rollback becomes the buyer's responsibility. Because this can be negotiated, it should be written into the contract.
How many years of rollback tax are owed?
Three years for land classified as agricultural or forest, and five years for land classified as open space. The amount is the difference between the tax actually paid under Greenbelt and the tax that would have been due at full market value.
Can I use a 1031 exchange when I sell farmland?
Usually, if the land was held for investment or used in a business such as farming, and you buy other investment or business real estate with the proceeds. The exchange has to be set up with a qualified intermediary before your sale closes, and the deadlines are strict.
If I sell my farm with my house on it, is any of the gain tax-free?
Possibly part of it. The federal home-sale exclusion can cover up to $250,000 of gain, or $500,000 for a married couple filing jointly, on your main home if you owned and lived in it for at least two of the last five years. It applies to the house and the land used with it as a residence, not to the farmland, so the sale price has to be divided between the two.
When should I talk to an accountant?
Before you list, and certainly before you sign a contract. An exchange, an installment sale or a division between the home and the farm all have to be set up in advance.