That's the way I understood it worked for business use of the home in the past, but here's a direct cut/paste from the current IRS Pub. 587 that seems to indicate that's no longer the case.
"If the part of your property used for business is within your home, such as a room used as a home office for a business or rooms used to provide daycare, you do not need to allocate gain on the sale of the property between the business part of the property and the part used as a home. In addition, you do not need to report the sale of the business part on Form 4797, Sales of Business Property. This is true whether or not you were entitled to claim any depreciation. However, you cannot exclude the part of any gain equal to any depreciation allowed or allowable after May 6, 1997"
Does this rule only apply to business use of the home, not farming operations carried out on the property, or what? Seems like if I'm not obligated to allocate the business/personal mix for running a small business from my home, the rules should be the same for running a small farming business on the property. In both cases the gains/losses are reported on form 4797, so it seems like my home-based farm would be the same as a home based business.
EDIT: I read a bit more and in pub. 523 it refers to "a working farm with a farmhouse on the property" being treated differently than just using part of the house for business. If I have no employees, no farm equipment, and its a very small 1 acre operation grossing a few thousand dollars per year, is that considered a "working farm" or more of a "hobby farm". It seems to me that a "working farm with a farmhouse on the property" is a large acreage farm, which happens to have a home on the land because the owner wants to live there as well. In my case the trees just happen to be on what is otherwise a primary residence, its not a farm in the normal sense of the word.
If what you reported earlier is actually the case, and I do have to allocate the personal/business portions, then what can I do to avoid that tax treatment when I sell the house? I think if I discontinued the farm activity for 2 years before selling the house that would remove the need to allocate the personal/business mix and gain back the full exclusion amount, am I right about that?
Finally, if I did have to allocate, would I just include the value of the trees/irrigation system in my business/personal allocation, or would I have to allocate a percentage of the land that the trees occupy and put some of the land value in that calculation?
