farm

Benefits of Exchanging the Family Ranch with a 1031

Family Ranch 1031 Exchange

What are the benefits of doing a land exchange on the sale of a family ranch or farm? That's our topic for this 1031 exchange educational article.

2 Parts of Farmland

Farmers typically have a large plot of farmland that can be separated into two separate sections for tax purposes:

  1. A small homestead where they live
  2. Lots of tillable acreage on which they grow their crops

Section 121 & Section 1031

These two different parts of the farm can have radically different tax treatment. Under section 121 of the Internal Revenue Code there's a principal residence exclusion for the sale of one's principal residence or domicile that would be applicable to the portion of the property the farmer lives in and the little curtilage around that farmstead. The rest of the acreage is eligible for 1031 tax deferral because it's used in the farm or ranch’s business.

So we can have two different tax treatments for the disposition of one farm or ranch. The best strategy is to try to maximize the tax-saving benefits of both. Selling the family ranch in a 1031 exchange (coupled with a 121 exclusion), can bring huge tax savings for you and your heirs. 

  • 1031 Hotline: If you have questions about the benefits of exchanging the family ranch in a like-kind exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

 

1031 Exchanges of Farmland

1031 Exchange of Farmland

Farmers like to buy farmland. They know it, they understand it, and they feel comfortable 1031 exchanging into other farmland. But what do you do if the kids don't want to take over the farm and your farm has risen dramatically in value?

Cash-on-Cash Returns

Often the cash-on-cash returns from agricultural land pales in comparison to the cash-on-cash returns that you can get with a commercial property; not to mention the consistency and reliability of commercial rental returns that are not impacted by commodities markets, the weather, and potential changes for crop insurance.

So people that are getting out of farming may want to sell their farms at the top of the market and exchange that money tax-deferred into like-kind real estate that doesn't necessarily have to be more farmland, such as:

  • a CVS drug store
  • a Walgreens
  • a Kentucky Fried Chicken

Or it could be some other commercial property that's going to generate a steady eddy stream of income for the taxpayer.

Advantages of a 1031 Exchange

The advantage of doing a 1031 exchange is that you can gain a certain amount of diversity and safety by taking your money out of the land and exchanging it into one, two, or three replacement properties that might be a different business segments (retail, industrial, commercial, medical) and also might be in different segments of the country geographically.

So I might buy an Arby's in Texas, and I might buy a hotel in California. The idea is that I want to spread my money out so I don't have all of my eggs in one basket and I've created for myself a steady stream of income during my retirement years. The Mantra is to defer, defer, defer…die. You want to pass these properties on to your heirs so that they can receive the inheritance and step-up in basis on these replacement properties.

  • 1031 Hotline: If you have questions about 1031 exchanges of farmland, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Farmland Capital Gains & 1031 Exchanges

farm equipment 1031 exchange

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.

 

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved