Many farmers do not realize the enormous benefit that a 1031 exchange can afford them. Section 1031 of the tax code allows for the exchange of investment or business assets. Exchanging up in value defers of all taxes. Farmers can exchange land through this tax code if they used the property for investment use.
Exchange Livestock and Business Assets
Many farmers do not take advantage of a section in code 1031 that allows them to defer the tax on the sale of livestock and business assets, like tractors. Farmers can exchange livestock as long as it is held for investment. The most common types of livestock include breeding stock and milking cows. There are some specific rules about livestock, however. Livestock exchanges must be of the same sex, and typically the farmer cannot exchange between breeds. For example, a farmer could not exchange milking cows for beef cows.
Farmers can also exchange equipment. Usually, this means tractors, machinery, or irrigation equipment. Assets in a 1031 exchange must be of the same general asset or product class. The IRS defines like-kind asset classes in detail through NAICS.
A Case Study
A recent exchange included a farmer with a stud bull valued at $20,000. The farmer exchanged the stud for two younger bulls valued at $22,000 (for both). The farmer paid $5,000 for the original bull and had 2 useful seasons breeding him. The bull was owned in a C Corp and the farmer would have had to pay a tax of $5,250.00. But, with the 1031 exchange, no tax was due that year.
Farmers have three useful assets to exchange in a 1031 that can save them thousands of dollars in taxes; livestock, equipment, and land. If you would like more information on a 1031 exchange, please call us at (239) 333-1031.
Please note there are several rules to follow in a 1031 exchange. Visit our 1031 information page to learn more, and be sure to consult your tax advisor.