1031 real estate investment options photo collage

The hardest working people in America deserve a tax break.

A 1031 exchange can be a tremendous tax savings opportunity for farmers and ranchers. The current increase in the capital gains rates to 20 percent plus the healthcare tax of 3.8 percent warrants prudent tax planning by today’s family farm.

A 1031 exchange allows for real property held for use in investment, trade or business to be exchanged for other like-kind property and can result in a complete deferral of all taxes due, including state and local taxes. This means that the disposition of farmland and subsequent purchase of new investment real estate can be virtually tax-free.

One of the benefits of 1031 is that like-kind real estate can mean almost any type of investment real estate. For example, farmland can be sold and other investment real estate can be purchased. Other examples of like kind real estate include rental houses, duplexes, condos, TIC interests, ranch land or commercial property.

Opportunities for farmers in deferring the taxes on their land sales or land rights include:
  • If there is a homestead on the property the house can be separated to take advantage of the Section 121 home sale rules to eliminate $250,000 per person or $500,000 per couple.
  • There are states that consider water rights real property; these rights can be exchanged for income producing property.
  • Mitigation credits can be exchanged for other mitigation credits, which can make certain land more valuable to developers.
  • Certain land has mineral rights that can be exchanged because they are a separate deed on the property.
  • Unused land with timber or forest can be exchanged for other real estate.
  • Easements can also be exchanged for other easements to grant rights to certain properties.

Please note there are several rules that need to be followed in a 1031 exchange. Please request our 1031 Exchange Guide for more information.

Because of today’s economy, many farmers have had their wealth increase quite a bit over the last ten years. Never has tax planning been more important with the current set of tax laws. If you have questions about 1031 exchanges, feel free to contact our 1031 team at 239-333-1031 for a free consultation.

Recently, we were involved in an exchange of farmland in southern Michigan. Approximately 100 acres were sold at a fair market value of $11,000 per acre and exchanged into a new parcel that was more advantageous for farming in regards to proximity and ability to grow certain crops. All sales proceeds were invested into the new farmland. Not only was the tax deferred, more profitable crops could be grown, and it was closer to the main farm.

Another example involved a large chicken farm in southern Iowa. The farmers were able to secure a buyer and a purchase price was allocated between the land value and the business. The business portion was taxable immediately, while the land was sold using a 1031. The land proceeds were reinvested into tillable farm land. The couple now owns solid rental property that they rent to local farms. No tax was due on the land sale, assuming that land of greater value is purchased.

The final 1031 example involves ranch land in Colorado. An older couple was able to sell their land that had appreciated in price from the original purchase. They had over $10,000,000 in gains. The proceeds were exchanged for new investment property in Florida. The tax on the gain would have been approximately $2,843,000. The new property was a large commercial rental property that included all NNN leases and had great cash flow since there was no debt. The couple was able to keep over $2.8M in their pockets and invest it in appreciating real estate. This is the power of a 1031 exchange.