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The Farm CPA

RSS By: Paul Neiffer, Top Producer

Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.

Get Cash in 2011, Pay Tax in 2013

Jun 15, 2011

With the rapid increase in farm land prices over the last year or so, many farmers are now considering selling some farm land to lock in these high prices.  The Tax Code allows a farmer to reinvest the proceeds from this sale into other real estate using a tax-deferred exchange under Section 1031 (commonly known as a 1031 exchange). 

Generally, the farmer has 45 days after the closing of the sale to identify the property they want to buy (usually 3 can be identified without any risk) and then another 135 days to actually purchase the property, or 180 days in total.

As we approach the beginning of July, farmers have another option using a 1031 exchange that is not available for sales before that date.  This option allows the farmer to receive cash from the sale (actually it must be held by a third party accommodator), but not report the gain until 2012 and pay the tax in 2013.

Here’s how it works. For any sale that happens after approximately July 5 has 180 days to identify and close on the purchase of the new property.  This 180 day period ends in January of 2012.If the farmer is unable to actually purchase replacement property during this time period, the installment sale rules determine when the gain is reported.  Under these rules, as long as the farmer had properly identified the replacement property and has been unable to purchase this property AND the cash is not received by the farmer until 2012, the gain is taxable in 2012 and the tax is due on April 15, 2013 (or March 1, 2013 under the applicable estimated tax rules).

This is a method to allow farmers to actually lock in the price, get the cash into an interest bearing account and defer the tax for an additional tax year.  This can be complicated and  involve a qualified accommodator to handle this type of transaction.  But deferring the tax on a $1 million-plus gain for another year may be worth the extra work involved.

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COMMENTS (2 Comments)

Rex8u1 - MD
Would they have to file an estimated? vs wait til the following year to pay the tax.

If there was debt on the relinquished and only the cash is returned in the following year - don't they have to pay taxes on the mortgage boot right away?

3:01 PM Jun 17th
Andy Gustafson, Certified Exchange Specialist® - Zionsville, IN
Paul is correct. After closing on the sale of farmland on July 5th, the forty fifth calendar day post closing to identify replacement property is August 19th. Once identified the exchange period ends January 1, 2011. If no property is acquired, the funds plus interest earned if placed in an interest bearing account, are returned to the Exchangor. Exchanges entered into after July 5th have the potential of closing in 2011 and receiving the cash proceeds in 2012 and reporting on 2013 taxes.

To view a brief article on three farmland trends go to
8:11 AM Jun 16th
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