Selling Land

How Farms and Ranches Make Use of 1031 Exchanges

How Farms and Ranches Make Use of 1031 Exchanges

Farms and ranches are made up of real and personal property. Depending upon the intent of the owner, land can be sold in a 1031 exchange replacing with a variety of real property choices including real estate and possibly an asset that provides cash flow such as a triple net lease property with a tenant like CVS Pharmacy. In recent years, given the historically low capital gains rate of 15%, paying the tax was and is an option.

If the owner wants to continuing their farming operations, the option starts with their accountant understanding the tax consequences of the sale. What is the value of the real estate, equipment and livestock? Are there water rights, mineral interests, gas and oil rights or easements that can be sold and gain deferred? If gain exists, the gain can be deferred by replacing with real estate and like kind personal property.

The primary residence stands on its own complying with Section 121 and the two year holding requirement to exclude either $250,000 if filing single or $500,000 if a joint return. A rule of thumb used to determine the amount of surrounding land that can be included with the residence is the area of grass typically cut around the home.

The personal property includes livestock and farming equipment. Does the owner want to replace or simply sell and pay the tax on the gain if one exists? The owner may have losses that can offset some of the gain.

A variety of decisions are required when selling farms and ranches and whether a 1031 exchange makes sense. Always seek the input of your accountant when selling real or personal property.

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About the author

Andy Gustafson, CES

Andy Gustafson, Certified Exchange Specialist®, is a managing member of Atlas 1031 Exchange, LLC, a nationwide accommodator of Internal Revenue Code Section 1031. He founded the company in 2007, and has since expanded his professional services into Texas and the Midwest. He has spoken to hundreds of investors at Wealth Camps and Real Estate Investment Clubs nationwide and is a sought after speaker on the topic. As an approved continuing educational provider, he has helped hundreds of Realtors, Attorneys, and CPAs understand the application of the 1031 code. To date he has accommodated over 500 exchanges representing $433,000,000 in exchanged value and deferring over $22,000,000 in taxes.

5 Comments

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  • Andy,
    Thanks for sharing the rule of thumb about land around the house (grass cut around the home) that is a common question. Great article.
    Best Wishes,
    Marisa

  • Andy,

    My partner and I have been active over the past 15 years in the Dallas / Ft. Worth market and found that the 1031 market dried up after 2008. We still have certain properties that we could exchange but do not see any action. Since you are in the area do you still see properties in the corridor of growth trading ?

    Thanks.

    we do have web sites for each of our projects if you want to see them including a large ranch in West Texas

  • Hello Randy,

    You are right, the 1031 exchange market has declined considerably. The Joint Committee on Taxation estimates the value of tax deferrals in 2012 to be $3.2 Billion with corporations and individuals accounting for $2.0 Billion and $1.2 Billion respectively. I estimate that represents 500,000 or more exchanges.

    So there continues to be activity but down from the $75 Billion in 2005. In the DFW market, exchanges continue typically for apartments and commercial property.

    Send your web site and ranch listing to andgus@atlas1031.com. We post ranch and commercial listings for free.

    Thanks for your question.

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