Recently, a client came to me with a question about farmland capital gains and their 1031 exchange. The lender they spoke with was concerned that they wouldn’t be able to transfer farmland capital gains into a NNN lease retail store with a 1031 exchange. Specifically he was worried about the like-kind definition. So is there anything taxpayers need to be aware of in this type of situation? Great question.
Farmland Improved Property
Generally “unimproved” farm land may be exchange for other “improved” real property with buildings.
Section 1.1031(a)-1(b) of the Income Tax Regulations defines like-kind as referring to the nature or character of the property and not to its grade or quality. One kind or class of property may not, under hat section, be exchanged for property of a different kind or class. The fact that any real estate involved is improved or unimproved is not material, for that fact relates only or the grade or quality of the property and not to its kind or class. See https://www.irs.gov/pub/irs-wd/0404044.pdf
Most real property that is exchanged is 1250 property, with slow depreciation schedules.
Sometimes farmers have some 1245 property (that has faster deprecation) mixed in with the Relinquished Property that is sold such as cribs, grain storage bins, and silos. If a high amount of the purchase price is allocated to the 1245 property, then that could trigger some gain unless this 1245 property can be matched-up with a sufficient amount of new 1245 in the Replacement Property in order to defer 100% of the gain.
- 1031 Hotline: If you have questions about 1031 exchanges of farm property, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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