Senate
File
636
-
Introduced
SENATE
FILE
636
BY
COMMITTEE
ON
WAYS
AND
MEANS
(SUCCESSOR
TO
SF
593)
A
BILL
FOR
An
Act
relating
to
the
exclusion
from
the
individual
income
tax
1
of
certain
net
capital
gains
from
the
sale
of
real
property
2
used
in
a
business,
and
including
applicability
provisions.
3
BE
IT
ENACTED
BY
THE
GENERAL
ASSEMBLY
OF
THE
STATE
OF
IOWA:
4
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636
DIVISION
I
1
CAPITAL
GAINS
TAXATION
——
MATERIAL
PARTICIPATION
2
Section
1.
Section
422.7,
subsection
21,
paragraph
a,
Code
3
2019,
is
amended
by
adding
the
following
new
subparagraph:
4
NEW
SUBPARAGRAPH
.
(3)
(a)
For
purposes
of
determining
5
the
material
participation
of
a
taxpayer
under
this
paragraph
6
with
regard
to
a
partnership,
subchapter
S
corporation,
limited
7
liability
company,
estate,
or
trust
whose
capital
gain
flows
8
through
to
the
owners
or
beneficiaries
for
federal
income
tax
9
purposes,
material
participation
shall
be
determined
at
the
10
owner
or
beneficiary
level
according
to
the
activities
of
each
11
owner
or
beneficiary.
12
(b)
For
purposes
of
determining
material
participation
of
a
13
taxpayer
under
this
paragraph
with
regard
to
the
sale
of
real
14
property
used
in
a
business
or
rental
arrangement
by
an
estate
15
or
trust,
all
beneficiaries
or
owners
of
the
estate
or
trust
16
shall
be
treated
as
materially
participating
in
the
business
or
17
rental
arrangement
if
one
or
more
of
the
executors
or
trustees
18
of
the
estate
or
trust
are
materially
participating
in
the
19
business,
or
if
the
real
property
is
leased
to
another
person,
20
the
executor
or
trustee
is
materially
participating
in
the
21
lessee’s
business
that
uses
the
real
property.
The
ten-year
22
period
described
in
paragraph
“a”
,
subparagraph
(1),
is
deemed
23
to
be
met
by
any
combination
of
material
participation
by
the
24
decedent
or
settlor
or
one
or
more
executors
or
trustees,
in
25
the
aggregate,
over
the
ten-year
period.
26
Sec.
2.
APPLICABILITY.
This
Act
applies
to
tax
years
27
beginning
on
or
after
January
1,
2020.
28
DIVISION
II
29
CAPITAL
GAINS
TAXATION
——
MATERIAL
PARTICIPATION
——
FUTURE
30
INCOME
TAX
CHANGES
31
Sec.
3.
2018
Iowa
Acts,
chapter
1161,
section
113,
32
subsection
21,
paragraph
a,
subparagraph
(3),
is
amended
to
33
read
as
follows:
34
(3)
“Materially
participated”
or
“material
participation”
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means
the
same
as
“material
participation”
defined
in
section
1
469(h)
of
the
Internal
Revenue
Code
.
,
except
under
the
2
following
circumstances:
3
(a)
For
purposes
of
determining
the
material
participation
4
of
a
taxpayer
with
regard
to
a
partnership,
subchapter
S
5
corporation,
limited
liability
company,
estate,
or
trust
whose
6
capital
gain
flows
through
to
the
owners
or
beneficiaries
for
7
federal
income
tax
purposes,
material
participation
shall
be
8
determined
at
the
owner
or
beneficiary
level
according
to
the
9
activities
of
each
owner
or
beneficiary.
10
(b)
For
purposes
of
determining
material
participation
11
of
a
taxpayer
with
regard
to
the
sale
of
real
property
used
12
in
a
business
or
rental
arrangement
by
an
estate
or
trust,
13
all
beneficiaries
or
owners
of
the
estate
or
trust
shall
14
be
treated
as
materially
participating
in
the
business
or
15
rental
arrangement
if
one
or
more
of
the
executors
or
trustees
16
of
the
estate
or
trust
are
materially
participating
in
the
17
business,
or
if
the
real
property
is
leased
to
another
person,
18
the
executor
or
trustee
is
materially
participating
in
the
19
lessee’s
business
that
uses
the
real
property.
The
ten-year
20
period
described
in
paragraph
“b”
,
is
deemed
to
be
met
by
21
any
combination
of
material
participation
by
the
decedent
or
22
settlor
or
one
or
more
executors
or
trustees,
in
the
aggregate,
23
over
the
ten-year
period.
24
EXPLANATION
25
The
inclusion
of
this
explanation
does
not
constitute
agreement
with
26
the
explanation’s
substance
by
the
members
of
the
general
assembly.
27
DIVISION
I
——
CAPITAL
GAINS
TAXATION
——
MATERIAL
28
PARTICIPATION.
Under
current
law,
a
taxpayer’s
net
capital
29
gain
from
the
sale
of
a
business,
or
from
the
sale
of
real
30
property
used
in
a
business,
is
exempt
from
the
individual
31
income
tax
if
the
taxpayer
held
the
real
property
or
the
32
business
for
a
minimum
of
10
years,
and
materially
participated
33
in
the
business
for
10
years.
“Material
participation”
refers
34
to
the
level
of
involvement
a
taxpayer
has
in
the
operations
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of
a
business,
and
whether
or
not
any
particular
taxpayer
1
materially
participates
in
a
business
is
determined
under
the
2
Internal
Revenue
Code.
3
This
bill
requires
that
for
purposes
of
determining
material
4
participation
of
a
taxpayer
for
the
capital
gain
tax
exemption
5
with
regard
to
a
partnership,
S
corporation,
limited
liability,
6
estate,
or
trust
whose
capital
gain
flows
through
to
the
owners
7
or
beneficiaries
for
federal
income
tax
purposes,
material
8
participation
shall
be
determined
at
the
owner
or
beneficiary
9
level
according
to
the
activities
of
each
owner
or
beneficiary.
10
The
bill
also
provides
an
exception
to
this
material
11
participation
requirement
for
the
sale
of
real
property
used
12
in
a
business
or
rental
arrangement
which,
under
certain
13
circumstances,
attributes
the
material
participation
of
certain
14
representatives
of
an
estate
or
trust
to
the
beneficiaries
or
15
owners
of
that
estate
or
trust.
For
purposes
of
determining
16
material
participation
of
a
taxpayer
with
regard
to
the
sale
17
of
an
estate’s
or
trust’s
real
property
used
in
a
business
or
18
rental
arrangement,
all
the
beneficiaries
or
owners
of
the
19
estate
or
trust
shall
be
treated
as
materially
participating
in
20
a
business
or
rental
arrangement
for
any
year
if
an
executor
or
21
trustee
of
the
estate
or
trust
is
materially
participating
in
22
the
estate’s
or
trust’s
business
or,
if
the
real
property
is
23
leased
to
another
person,
the
executor
or
trustee
is
materially
24
participating
in
the
lessee’s
business
that
uses
the
real
25
property.
The
bill
also
provides
that
the
10-year
material
26
participation
requirement
under
Code
section
422.7(21)(a)(1)
27
can
be
satisfied
by
any
combination
of
years
of
material
28
participation
attributable
to
decedent,
settlor,
or
one
or
more
29
executors
or
trustees,
aggregated
over
the
10
years
preceding
30
the
sale.
31
Division
I
applies
to
tax
years
beginning
on
or
after
January
32
1,
2020.
33
DIVISION
II
——
CAPITAL
GAINS
TAXATION
——
MATERIAL
34
PARTICIPATION
——
FUTURE
INCOME
TAX
CHANGES.
The
bill
amends
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636
2018
Iowa
Acts,
chapter
1161,
section
113,
to
align
future
1
income
tax
changes
with
the
changes
in
Division
I
of
the
bill.
2
By
operation
of
law,
the
changes
in
Division
II
will
begin
3
in
tax
year
2023
or
in
a
later
tax
year,
contingent
upon
the
4
satisfaction
of
certain
net
general
fund
revenue
amount
and
5
growth
targets.
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