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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