When farmland is sold it is treated as a capital asset unless it was used in an active farming business. The sale would normally be reported on either Form 8949 and Schedule D of your tax return. These forms calculate the gain or loss on the sale price of the property minus the adjusted basis (the Price you paid for the property plus improvements, minus depreciation if the property was used for business use).
If the land was part of the farming business operation, any building, equipment, or depreciable improvement sold with the land needs to be reported separately on the Form 4797 for business property. This is due to the fact the IRS treats your gain from depreciated assets differently than the land. It is important to separate these amounts in your records.
In summary:
- Personal use or investment farmland → Report on Form 8949/Schedule D
- Business use farmland → Report land on Schedule D, report improvements on Form 4797
For more details see IRS Publication 225 - Farmer’s Tax Guide.
