Iowa’s tax law rewards persistence, but you have to have a lot of it. Iowa allows you to exclude from taxable income capital gain from real property used in a trade or business if you have both held the land for ten years and have “materially participated” in the business for ten years. The exclusion can also apply when you sell your business.
A policy letter released this week shows that even if you have ten years’ worth of persistence, you might not win. Iowa lays out the facts:
Your scenario involves a taxpayer who is a 50% owner of a limited liability company that purchased commercial real estate in Cedar Rapids in 1999. The property consisted of five acres, of which three acres included a large commercial building and two acres consisted of vacant land. The building was leased to several tenants and the vacant land was never rented out. The taxpayer’s participation in the rental business constituted substantially all of the participation in the rental business. In 2010, the two acres of vacant land was split off and sold, and the limited liability company still owns the building and the three acres. You are asking if the sale of the two acres of vacant land qualifies for the Iowa capital gain exclusion.
Iowa said that the vacant land wasn’t “used in the business,” so the exclusion was unavailable.
This continues a long-time trend at the Department of interpreting gain eligibility narrowly.
