2025 Policy Development: Income Tax Exemption Parity (State)

In 2023, Iowa tax law was changed to allow eligible individuals the ability to elect to exclude the following form of income from income taxation:

• Net income received from a written farm tenancy agreement; IF
• Derived from real property held by an eligible individual for ten or more years; WHERE
• The eligible individual materially participated in a farming business for ten or more years prior.

In the same law, an eligible individual is defined as:

• Disabled or 55 years of age or older at the time the election is made;
• No longer materially participates in a farming business at the time the election is made; AND
• An owner-lessor involved in a farm tenancy agreement.

If this election is taken, the elector may not use the Iowa capital gains deduction in the future. They are also not eligible for the beginning farmer tax credit program moving forward.

The exclusion is also only available to individuals. So, in instances where an individual is part of an entity that is taxed as a partnership, S corporation, trust, or estate, they are not currently eligible for this exclusion.   Single-member LLCs and revocable living trusts are currently eligible for the exclusion as they are considered “disregarded entities” – a tax status granted to single-member entities where an individual has elected for the entity to NOT be taxed separately for income tax purposes, and instead report the income of the entity as part of their personal income for taxation.

Discussion Questions:

1. Would current law make you reconsider the current tax treatment of your operation?
2. Are you concerned current law impacts your ability to plan for passing your operation to the next generation?