Capital gains tax in Iowa (2026): selling a business, real estate or farm
Who owes nothing to Iowa on a farmland sale
Iowa is the rare state where the same 3.8% rate (Iowa Code 422.5, 2026) can fall to zero for the asset most Iowa sellers own: farmland. Iowa Code 422.7(13) subtracts the entire net capital gain from selling real property used in a farming business if either test is met:
- You held the land at least 10 years and materially participated in a farming business for at least 10 years (holding periods use IRC 1223, so tacked periods count).
- You sell the land to a relative, defined out to second-degree relatives, lineal descendants and entities they own.
Land classified as agricultural for property tax is presumed to qualify, including farm houses, machine sheds, grain storage, pasture, timber and conservation acres. Claim it on Form IA 100H for sales after 2022.
The heir and landlord problem, in numbers
Heirs who cash-rent inherited ground rarely pass the 10-year participation test, and the relative-sale route only helps if family buys. In the first example a couple sells inherited, cash-rented land for a $1.8 million gain: Iowa takes $68,400, federal income tax is $343,000, and because rent ground is an investment, the 3.8% net investment income tax adds $62,320 (IRC 1411, 2026). Total tax caused: $473,720.
The second example is the same sale by owner-operators. Their land is used in an active trade, so the net investment income tax drops away and the total falls to $411,400, a difference of $62,320. If they also meet the 10-and-10 test, the $68,400 Iowa line is deducted too. Federal brackets are summarized in the capital gains guide: 0%, 15% and 20%, with 20% above $613,700 of joint taxable income in 2026 (Rev. Proc. 2025-32).
The retired farmer election and breeding livestock
A retired farmer (age 55 or older, or disabled, and no longer materially participating) is treated as meeting the participation test if he farmed 10 or more years in total. He may make a single, lifetime election on Form IA 100G to exclude qualifying gains on land, on cattle or horses held 24 months or more for breeding, draft, dairy or sporting use, and on other breeding livestock held 12 months or more (Iowa Code 422.7(13), 2026 Code).
The election has a price. A farmer who takes it cannot later claim Iowa's separate exclusion for net farm tenancy income, and the beginning farmer tax credit is unavailable that year and after. Active farmers who earn more than half their gross income from farming can separately subtract breeding cattle, horse and livestock gains under Iowa Code 422.7(44). See capital gains tax on farmland.
Business owners: the deduction that ended, and the one that survived
Before 2023 Iowa let owners deduct gain on selling a business they had held and worked in for 10 years. That deduction now survives only for installment sales made before Jan. 1, 2023, reported on IA 100E as payments arrive. A business sold today pays 3.8% on goodwill, recapture and real estate alike.
What Iowa added instead is an employee-owner stock deduction: 33% in 2023, 66% in 2024 and 100% from 2025 (Iowa Code 422.7(42)). It requires stock held at least 10 years, acquired through at least 10 years of employment, in a corporation that employed Iowans for 10 years and had at least five shareholders. It is one irrevocable election for one company, covering later sales of that stock for 15 years. See also ESOP and Section 1042.
Land contracts and installment sales in Iowa
Iowa farmland has long changed hands on contract, and Iowa follows the federal installment method because it starts from federal income. For a sale that qualifies for the farm deduction, each year's installment gain is deducted as it is reported. For one that does not, spreading payments leaves the flat 3.8% Iowa bill (2026) about the same but can keep more of the gain in the 15% federal bracket and lower the net investment income tax. Farm property is also exempt from the Section 453A interest charge on large notes (IRC 453A(b)(3)). See Section 453 installment sale and seller financing for down payment, mortgage and forfeiture terms.
School surtax, nonresidents and heirs
Your school district can add a surtax of up to 20% of your Iowa income tax, and a few counties add an emergency medical services surtax of up to 1% of the tax (Iowa Department of Revenue, 2026). Both are percentages of the tax, so a 10% district surtax adds about 0.38% of the gain.
Nonresidents owe Iowa tax on gain from Iowa land and business property, so moving away does not take Iowa farmland out of Iowa's reach. Heirs no longer face Iowa inheritance tax for deaths on or after Jan. 1, 2025 (Iowa Code 450.98), and inherited land takes a federal stepped-up basis; compare holding until death with a sale now. Nearby: Nebraska, Illinois and Minnesota.
Hans studies the tax side of Iowa land and business sales. Get the Big Sale Tax Analysis.
What to know
The engine applies Iowa's 3.8% to the whole gain; it does not compute the farm deduction, so qualifying sellers should read the Iowa line as the amount the deduction removes. Material participation follows IRC 469(h) and is a facts question the Department can challenge, and the retired farmer election is once in a lifetime and shuts off the farm tenancy exclusion. Seller financing defers tax but leaves you carrying the buyer's credit until the contract is paid.
Worked example
Married couple, $90,000 of other income, inherited Iowa cropland years ago and cash-rents it; $1,800,000 long-term gain in 2026. They never farmed it, so no Iowa deduction and the gain is net investment income. Same income and gain, but the sellers farm the land themselves, so the federal 3.8% net investment income tax does not apply. Iowa tax is shown before the farm deduction.
| Engine run | Cash-rented farmland sold by heirs | Same gain, owner-operator |
|---|---|---|
| Filing status | Married, joint | Married, joint |
| State | Iowa | Iowa |
| Other income (wages, pension, interest) | $90,000 | $90,000 |
| Long-term capital gain | $1,800,000 | $1,800,000 |
| Federal income tax on the sale | $343,000 | $343,000 |
| Net investment income tax (3.8%) | $62,320 | $0 |
| State income tax on the sale | $68,400 | $68,400 |
| Total tax caused by the sale | $473,720 | $411,400 |
| Effective rate on the gain | 26.3% | 22.9% |
| Gain kept after these taxes | $1,326,280 | $1,388,600 |
Computed October 7, 2026 by the Big Sale Tax engine (engine.js yearTax): federal brackets, 0/15/20% thresholds and AMT from Rev. Proc. 2025-32 (OBBBA-adjusted) and the One Big Beautiful Bill Act (P.L. 119-21); NIIT under IRC 1411 (thresholds not indexed); state tax from the engine's state table. "Tax caused by the sale" = tax with the sale minus tax without it. Excludes selling costs, local taxes and estimated-tax timing. Education only.
Run your own numbers
2026 law from the engine: federal 0/15/20% brackets (Rev. Proc. 2025-32), 25% cap on unrecaptured 1250 gain, ordinary rates on 1245 recapture, 3.8% NIIT over $200,000 single / $250,000 joint (IRC 1411), AMT, and your state's rules. Tax shown is the tax caused by the sale. Excludes selling costs, local taxes and NIIT exceptions for active business owners. Education only.
Long-Term vs Short-Term Capital Gains (2026)
The one-year holding rule, the 2026 0/15/20% thresholds for every filing status, NIIT, recapture, the state layer and a worked $200,000 example: 11 months vs 13 months, and what spreading the gain can save.
Frequently asked questions
Does Iowa tax capital gains?
What is the Iowa capital gains tax rate for 2026?
Is there capital gains tax on farmland in Iowa?
Does Iowa have capital gains tax on real estate?
How are capital gains taxed in Iowa if I sell my business?
Does Iowa still have an inheritance tax?
Sources
- Iowa Code 422.5 (rate, 2026 Code)
- Iowa Code 422.7 (capital gain deductions, 2026 Code)
- Iowa DOR IA 100H farm real property deduction
- Iowa DOR IA 100G retired farmer election
- Iowa DOR IA 100E business deduction (pre-2023 installment sales)
- Iowa DOR tax and fee descriptions (school and EMS surtax)
- Iowa Code 450.98 (inheritance tax repeal)
- Rev. Proc. 2025-32 (2026 federal brackets)
Figures as of October 7, 2026; each rate and limit above names its source and year. Education only, not legal or tax advice.
Keep reading
Farmland
A farm sale is five tax sales at once, and whether you cash rent or farm the ground decides the 3.8% layer.
ReadLand sale
Raw land has no depreciation to recapture, so the big question is whether the IRS sees you as an investor or a dealer.
ReadSale of a business
Why one price becomes seven tax buckets, which pieces are ordinary income, and what an active owner can keep out of the 3.8% NIIT.
ReadNebraska
A one-time election can remove Nebraska tax on employer stock, and the general rate falls again on January 1, 2027.
ReadMinnesota
Minnesota has its own 1% net investment income tax over $1 million, with a carve-out for farmland and no credit for other states' taxes.
ReadFarm installment sale
Selling farmland on a land contract: the gain spreads, there is no Section 453A interest charge at any size, and Section 1062 is new for 2026.
ReadKnow your number before you sign.
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