Here’s a question posed to me one time by a tax professional in another state, regarding Iowa taxation of non-residents who sell Iowa farmland.

Scenario

The taxpayer lives in California but has relatives in Iowa. One of the relatives dies and leaves farmland to the taxpayer, who then sells the farmland on an installment basis.

The capital gain is recognized in the year of the sale and is taxable in Iowa. But what about the yearly interest income the taxpayer receives on the contract going forwardt?

The answer is: the yearly interest payments are NOT taxable in Iowa. See Iowa Department of Revenue Memorandum 8-84-1-P from 1984:

Interest received by a nonresident taxpayer from the sale of an Iowa farm is not considered to be income derived from a business, trade, profession or occupation carried on within Iowa. Therefore, interest received by a nonresident from the sale of an Iowa farm is not subject to Iowa income tax.

Interest received by a nonresident taxpayer from the sale of an Iowa farm would also not be taxable to Iowa in a situation where the taxpayer had inherited the Iowa farm and the taxpayer had never been an Iowa resident.

 

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