Land prices for farmers and ranchers have increased. So, a 1031 exchange can be a tremendous tax-saving opportunity. The increase in capital gains rates and the healthcare tax will warrant prudent tax planning by today’s family farm.
Investment or business-use farmland can undergo a 1031 exchange for other like-kind property. Therefore, a complete deferral of all taxes, including state and local taxes results. The disposition of farmland and subsequent purchase of new investment real estate is virtually tax-free. 1031 exchanges are sometimes called Starker Exchanges based on the court case that helped define the regulations.
Successful 1031 Exchanges for Farms & Farmland
Recently, Midland facilitated an exchange of farmland in Southern Michigan. The farmer sold approximately 100 acres at a fair market value of $11,000 per acre. The farmer purchased/exchanged these 100 acres for a new parcel that was more advantageous for farming. The newly acquired land was closer to his distributors and had a better ability to grow certain crops. The farmer invested all sales proceeds in the new farmland. Not only were taxes deferred, but more profitable crops could be grown and placed the farmer closer to the main farm.
One of the benefits of a 1031 exchange is that like-kind real estate refers to almost any investment real estate. For example, you can sell farmland to purchase other investment real estate. Other examples of like-kind real estate include rental houses, duplexes, condos, TIC interests, ranch land, or commercial property.
Another recent example involved a large chicken farm in southern Iowa. The farmers were able to secure a buyer and allocated the purchase price between the land value and the business. The business portion is taxable immediately, while the land sells using a 1031 exchange. Then the seller reinvested the land proceeds into tillable farmland. The couple now owns a rental property that they will rent to local farmhands. No tax is due on the land sale, assuming that land of greater value is purchased.
Other land sale and land rights tax-deferral opportunities for farmers include:
- You can separate the homestead on the property to take advantage of the Section 121 home sale rules to eliminate $250,000 per person or $500,000 per couple.
- Exchange water rights as real property in states that consider water rights to be real property.
- Mitigation credits can be exchanged for other mitigation credits, making certain land more valuable to developers.
- You can exchange mineral rights as real property on certain land because they are a separate deed.
- Exchange unused land with timber or forest for other real estate.
- You can exchange easements for other easements to grant rights to certain properties as well.
The final 1031 example involves ranch land in Colorado. An older couple was able to sell their ranch land with an appreciated price from the original purchase. They had over $10,000,000 in gain. The sellers used their proceeds to purchase a new investment property in Florida. The tax on the gain would have been approximately $2,843,000.00. The new property was a large commercial rental property that included all NNN leases and had excellent 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 example demonstrates the power of a 1031 exchange for farms.
Please note several rules need following 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 over the last ten years. Tax planning has never been more critical with the current set of tax laws. If you have questions about 1031 exchange for farms, feel free to contact Midland 1031 at 239-333-1031 for a free consultation.