Iowa Form IA 125 Farm Tenancy Exclusion: Eligibility, Filing, and Special Cases

Iowa Form IA 125, the Farm Tenancy Income Exclusion (form 41-187), is the attachment retired or disabled Iowa landowners file with their IA 1040 to subtract qualifying written-lease farm income from Iowa taxable income. You complete the form, carry the exclusion to Line 18 of IA 1040 Schedule 1, and file it with your return.¹ Before you do, read the rest of this page. The election is for life, and it costs you two other Iowa tax benefits.

Confirm You Qualify Before You File

Every one of the following has to be true when you make the election. Missing one disqualifies you.²

You are 55 or older, or you are disabled. Disabled means receiving retirement benefits due to disability, or determined disabled by the Social Security Administration or another federal or state agency.³
You no longer materially participate in a farming business. If you are still planting, harvesting, managing livestock, or making day-to-day decisions, you are not eligible yet.
You materially participated in a farming business for at least ten years over your lifetime. The years do not have to be consecutive.
You have owned the leased real property for at least ten years.
You are the owner of the land and a party to a written farm tenancy agreement with a tenant.

For any past year, you meet the material participation standard if you worked more than 500 hours in the farming operation that year, or if your involvement was substantially all of the participation in the business.³

What You Permanently Give Up

Filing IA 125 is a single lifetime election. Once it is on a return, it cannot be undone, and it closes off two other Iowa tax benefits for every future year:²

The capital gain exclusion for retired farmers under Iowa Code section 422.7(13), which can shelter gains on the sale of farmland or certain livestock.
The beginning farmer tax credit under Iowa Code section 422.11E, which rewards landowners who lease to beginning farmers.

This matters most if you expect to sell the land someday. A capital gain on a farm sale can easily outweigh years of annual lease exclusions. Run both numbers before you file.

Which Lease Income Qualifies

Iowa recognizes three qualifying arrangements: cash leases, crop share leases, and livestock share leases.² A handshake deal does not count. The lease has to be written and spell out the rights and obligations of both sides.

The exclusion amount cannot exceed the fair profit two unrelated parties would agree to in an arm’s-length transaction. If you lease to a relative above market rent, the Department of Revenue can limit your exclusion to what the market would actually support.³

Filling Out Form IA 125

Download Form IA 125 (41-187) from the Iowa Department of Revenue’s individual income tax forms page.⁴ Before you start, pull together:

Your completed federal return, including Schedule E and Form 4835 if they apply
A copy of each written farm tenancy agreement
Deed records or purchase agreements showing how long you have held the property
Records supporting your ten years of past material participation

The form asks for the net income you received under the lease, meaning gross lease payments minus allowable expenses tied to the property. Cash rent reported on federal Schedule E uses the net rental figure from that schedule. Crop or livestock share income reported on federal Form 4835 carries over the net farm rental figure from that form.

Completing and filing the form is itself the election. By signing and submitting it, you are formally electing in and acknowledging the loss of the capital gain exclusion and the beginning farmer tax credit. The exclusion you calculate flows to Line 18 of IA 1040 Schedule 1 and reduces your Iowa net income.¹

Filing IA 125 With Your Iowa Return

IA 125 is not a standalone filing. Attach it to your IA 1040. If you file electronically, include it as a supporting schedule. On paper, place it behind your IA 1040 and Schedule 1. Confirm the exclusion appears on Schedule 1, Line 18.¹

The first year you file IA 125 is the year the lifetime election takes effect. In every later year you want the exclusion, attach the form again. You can also exclude income from new qualifying leases entered into after the original election, provided each parcel satisfies the ten-year holding period.³

Situations That Change the Calculation

Married Filing Separately

If you and your spouse both have qualifying farm tenancy income and file separate Iowa returns, you allocate the exclusion in proportion to each spouse’s share of the combined net farm tenancy income. A 60/40 split of the income produces a 60/40 split of the exclusion.²

Surviving Spouses

Iowa Code directs the Department of Revenue to set rules for whether a surviving spouse may continue the exclusion after the eligible individual dies.² If your spouse made the election and has since passed away, check Iowa Administrative Code rule 701-302.88 or contact the Department before filing.

Land Held in a Partnership, S Corporation, or Trust

Farm tenancy income that passes through a partnership, S corporation, trust, or estate does not qualify, even when it ends up on your personal return.² The exclusion is only available for lease income you receive directly as the individual owner-lessor. If title is in an entity, IA 125 is not the right form.

1
Iowa Department of Revenue. IA 1040 Schedule 1
2
Iowa Legislature. Iowa Code 422.7 – Net Income How Computed
3
Legal Information Institute. Iowa Code r 701-302.88 – Net Income From a Farm Tenancy Agreement Covering Real Property
4
Iowa Department of Revenue. Forms – Individual Income Tax