Selling or Leasing Land to a Data Center: Capital Gains Tax

How is each payment from a data center developer taxed?

Investment land held more than one year usually receives long-term treatment. Adjusted basis is your land's tax cost after adjustments, usually starting with purchase cost or inherited value. IRS basis guidance.

• Sale: price less adjusted basis and selling costs is gain; usual long-term rates are 0%, 15% or 20%, with possible 3.8% net investment income tax (NIIT). Land held mainly for sale to customers in a business produces ordinary income: the dealer rule. IRS capital gains guidance.
• Option: a genuine option payment stays open until exercise or lapse. IRS option guidance.
• Ground-lease rent and seller-financing interest: ordinary income as recognized each year. IRS rental guidance, installment guidance.
• Permanent easement: reduces affected land's basis; excess is gain. Temporary construction easement: rent. IRS farmer's guide.

How much data centers pay per acre determines proceeds, not tax category. Basis and structure matter for powered land in Northern Virginia, Texas, Georgia, Ohio, Indiana or Pennsylvania.

I live in Canada: what changes for my share of US land?

Living in Canada does not by itself make you a foreign seller. A nonresident alien is neither a US citizen nor a US tax resident. Green-card holders and people meeting the US presence test are generally US tax residents; treaty claims and dual-status years need review. IRS residency tests.

For direct foreign owners, buyers generally withhold 15% of the full price share, including the note, and can be liable if they fail to withhold. Sellers seeking a withholding certificate may apply on Form 8288-B. If applying, notify the buyer in writing on the closing day or the day before. Installment-sale certificates can adjust withholding to payments. An application submitted by closing can defer remittance while pending; it does not itself reduce withholding. Review generally takes 90 days after complete application. FIRPTA, certificates, remittance.

A US citizen or resident alien in Ontario generally supplies non-foreign certification, files Form 1040 and may owe NIIT. A US citizen or resident married to a nonresident generally uses the $125,000 NIIT threshold. A couple making a section 6013(g) or (h) joint-return election may also elect NIIT joint treatment on Form 8960 for the first year the US taxpayer owes NIIT; both sign the joint return. See NIIT election rules. Foreign credits cannot reduce NIIT under the IRS position; the Federal Circuit's Canada-treaty decision reversed the taxpayer's lower-court win.

Canada's reserve rules, generally at most five years here and unavailable to nonresidents, control Canadian timing, so credits may fall in different years.

For returns and refunds, see Canadians selling US real estate; for exchange mismatches, see exchanging a US rental property. CRA rules govern Canadian credits.

Are option payments and forfeited earnest money taxable?

A genuine land option waits until exercise or lapse: exercise adds the payment to sale proceeds; lapse makes retained money taxable. Tax Court discussion.

Do not assume capital gain when the developer walks away. Section 1234A addresses terminated rights involving capital assets; the Eleventh Circuit denied capital treatment for a forfeited deposit on business property. A sale deposit becomes taxable when the deal ends and your right to keep it becomes final. Investment-land deposits and lapsed options need separate character review; option treatment can be unsettled. Rent does not receive option deferral.

Should I sell or sign a long ground lease?

A sale realizes gain; a ground lease retains ownership and generates ordinary rent.

Retained land generally receives an inherited basis adjustment. Advance rent is taxable on receipt; see rental-property reporting. A lease exceeding $250,000 in total consideration with deferred, prepaid or changing rent needs a section 467 timing check.

Will rezoning or subdividing make my gain ordinary income?

Rezoning alone does not settle investor versus dealer status. Improving and repeatedly selling lots can indicate dealer activity; selling the whole tract with development left to the buyer presents a different pattern.

Section 1237 offers limited relief for subdivision, restricting substantial improvements and generally requiring five years of ownership, except inherited land. Business-use land also needs a section 1231 review: prior losses can make some gain ordinary. IRS Publication 544.

Can an installment sale spread capital gains tax?

An eligible installment sale spreads gain if payment extends beyond the sale year. Form 6252 splits principal between basis and gain. Depreciation recapture on improvements or equipment sold with the land is ordinary income in the sale year, even without a payment. Interest is ordinary income; insufficient interest triggers imputed interest. IRS Publication 537.

Form 1099-S still reports the full price, including the note. Large yearly gains may remain in the top band.

Deferred-tax interest may apply above $5,000,000 of qualifying outstanding obligations; farm property has an exception requiring review. The seller elects out by the sale-year return due date, including extensions, reporting the sale on Form 8949 or 4797 instead of Form 6252; gain is recognized immediately. A timely filed return can be amended within six months after the unextended due date to elect out. Revocation generally requires IRS consent. Buyers can default.

Can I exchange my farmland under section 1031 before closing?

An exchange can postpone gain through replacement business or investment real estate. If using a qualified intermediary, the written exchange agreement must precede the land transfer; the intermediary handles transfers and keeps proceeds outside your control. Receiving or controlling the entire price before replacement makes the transaction a sale; taking only part can make the exchange partially taxable.

US farmland can be exchanged for other qualifying US real estate, including a leasehold of at least 30 years. Personal homes, dealer land and foreign land do not qualify; cash retained can trigger gain. Your accountant in the past 2 years is generally disqualified from acting as your intermediary. Form 8824 instructions, IRS exchange rules.

Partnership interests are not qualifying real estate. Partnerships exchange at entity level; separate sibling routes need direct co-ownership review. Pre-closing title changes are risky. An exchange plus a seller-financed note can work under special installment rules, but a later note payment does not restart exchange deadlines.

What is my inherited-land basis, and will NIIT apply?

Inherited land generally has death-date market-value basis and long-term treatment. Alternate or special-use valuation changes basis. Form 8971 consistency applies to covered property. Basis guidance, holding-period rules.

Qualifying Texas community property generally adjusts both halves' basis at the first spouse's death; estate-inclusion conditions apply. Special-use farmland sold outside the family or taken out of qualifying farm use during the 10-year recapture period can trigger additional estate tax, including under a data center ground lease. Each qualified heir is personally liable on their interest unless bonded, and normally must file Form 706-A and pay within six months after the sale or cessation; the heir or representative signs. An irrevocable section 1016(c) election on that form, with interest from nine months after death, can restore death-date or alternate-date market-value basis immediately before the event. Exchanges and involuntary conversions also require Form 706-A, even if nontaxable. Section 2032A, Form 706-A instructions. The period generally starts at death but can extend if the heir delays starting qualified use. If the estate deferred estate tax under section 6166, cumulative dispositions or withdrawals reaching 50% of the qualifying business interest generally accelerate unpaid installments on IRS notice and demand.

Only the excess gets the top rate. NIIT is 3.8% of the lesser of net investment income or income above its threshold, which is not indexed. Cash-rented inherited land and ground-lease rent generally count; gain from your own nonpassive farming business can be excluded. Capital-gain bands, NIIT rules.

Do I need estimated payments after a big land sale?

Estimated payments generally are needed if expected tax after withholding and credits is at least $1,000 and withholding and credits fall below the smaller of 90% of current-year tax or the applicable prior-year target. Timely payments covering 100% of prior-year tax avoid the penalty; use 110% when prior-year adjusted gross income exceeds $150,000, or $75,000 for married filing separately. Farmer rules differ; the prior return must cover 12 months. Publication 505.

Form 2210's annualized income installment method bases payments on when income arrives. For calendar-year owners using it, gain first received September through December generally affects the payment due January 15, 2027. Extra withholding generally counts evenly across due dates. Recheck each installment year; remaining tax is due by the regular return payment deadline. Form 2210 instructions.

Can section 1062 cover a sale to a data center developer?

Selling farmland for data center development does not qualify for section 1062's four-installment tax-payment election. The buyer must be an individual actively engaged in farming, and an enforceable covenant must prohibit nonfarm use for 10 years after sale; use by the owner or leasing to a qualified farming tenant throughout substantially all the prior 10 years is required. Form 1062, proposed regulations. Seller financing is a separate rule.

Are power line and substation easement payments taxable?

A permanent utility easement reduces affected land's basis; excess is gain. A temporary construction easement is Schedule E rent. Keep allocations and surveys. Publication 225.

A condemnation threat must come from a body legally able to take the land, such as a government or utility with that power. It must have decided to acquire the property, with reasonable grounds to expect a forced taking if you refuse. A developer's offer alone does not qualify. For qualifying investment or business real estate, section 1033 can postpone gain if sufficient proceeds are reinvested in like-kind real property within three years after the end of the first gain year. The owner elects on a statement with the gain-year return; a partnership owning the land elects at partnership level. If replacement fails or costs too little, amend that return and pay the resulting tax. Severance damages reduce retained basis; excess is gain. Condemnation rules, section 1033.

Example

Illustrative alternatives in US dollars; no debt, selling costs or prior business losses.

Siblings sell inherited farmland in installments

Three siblings inherit 300 Texas acres at their father's death, worth $6,000 per acre: $1.8 million basis. A developer pays $300,000 for an 18-month option, credited toward buying at $50,000 per acre: $15 million.

Each sibling's $5 million share has $600,000 basis and $4.4 million gain. Assume $1 million of closing-year principal per sibling, including the option credit, with $1 million principal in each of the next four years plus interest. The gain fraction is 88%: $880,000 gain and $120,000 basis recovery in the closing year and each later year, totaling $4.4 million gain and $600,000 basis. Before exercise, the option year has no recognized option income. Interest is ordinary income. Count the option credit once.

For the Ontario sibling who is a US nonresident alien, FIRPTA withholding is $750,000: 15% of her full $5 million price, despite only $900,000 new cash at closing. Only IRS approval reduces withholding. If the option lapses instead, each sibling has $100,000 of taxable option income in the lapse year, with character requiring review.

An exchange or a ground lease

Without an option payment, one directly owning US-resident sibling routes $5 million through a qualified intermediary, identifies a farm within 45 days and buys within 180 days, before any earlier return deadline. Full reinvestment defers gain; $600,000 basis carries over. Keeping $500,000 would recognize that much gain. Ontario farmland cannot replace US land under section 1031.

A 40-year ground lease instead pays $450,000 annually, or $1,500 per acre: $150,000 ordinary rent per sibling. Inherited shares generally get death-date basis.

A substation easement

A permanent easement on 20 acres gives $280,000 gain: $400,000 proceeds less $120,000 basis ($6,000 per acre). A separate $30,000 temporary construction payment is Schedule E rent. Each sibling reports one-third of both amounts.

With a qualifying condemnation threat, each sibling electing and reinvesting their one-third share of the $400,000 proceeds in qualifying real estate within three years after the first gain year ends could postpone their share of the $280,000 gain.

Different for you?

Before signing, bring the option, contract, deed, estate valuation, payment schedule, land-use history and easements to an individual-tax review.

• Canada resident: sale reporting, exchange differences, US citizens in Canada and Canadian partners’ withholding.
• Owners outside both countries: nonresident property reporting.
• LLC or shared family ownership: property in an LLC, spouse and family LLCs, or partnership reporting.
• Canadian farmland: selling to a data centre developer.
• State tax: the land's state may also tax gain and require withholding at closing for nonresident sellers; Texas has no personal income tax. Include state exposure in the tax review.

Appraisal, contract drafting, eminent domain litigation, intermediary work, investing proceeds, farm-use property tax rollback and foreign-ownership rules such as CFIUS, USDA reporting by foreign sellers too, generally within 90 days of transfer, and Texas SB 17 need the appropriate lawyer, buyer or other adviser.