Planning to trade up or out some farmland this year? Consider doing a Section 1031 Tax-Deferred Exchanges (also known as like-kind exchanges). This strategy allows you to exchange an owned piece of farmland for another of equal or greater value and defer capital gain taxes on that sale.
Beyond the tax savings, a 1031 exchange can also let you consolidate your farmland without losing all the equity you’ve built up over the years, says David Brown, president and owner of IPE 1031, which provides qualified intermediary services for property exchanges.
But like any tax strategy, you need to understand the rules and requirements. Timing, for instance, is important, Brown says. Farmers only have 45 days to identify the piece of property they want to acquire. After that, they only have 180 days to acquire the property.
Additionally, you need to work with a qualified intermediary to ensure document terms, notices, identifications and other requirements are handled correctly.
“Planning in advance can create a lot of efficiencies and savings,” Brown explains. “You want a team of an experienced attorney, accountant and intermediary to help you through the process.”
The New Rules
The Tax Cuts and Jobs Act made Section 1031 exchanges a bit more complex to execute. For trades of farmland to be completely tax-free, the two pieces of land must have similar upgrades and features, says Paul Neiffer, a CPA and principal at CliftonLarsonAllen.
Does your land include items that classify as Section 1245 real property? These are depreciable items such as tiling, wells, irrigation pivots, fences, etc., and they will be fully taxable — even if you trade the property for other farmland, Neiffer explains.
However, if the farmland you are exchanging for includes these same items at equal or greater value than what you are selling, the income tax effect will likely be a wash.
“If you’re a farmer, and you have certain items on that ground that aren’t pure land, you really need to discuss that with your tax adviser before you enter into any type of exchange,” Neiffer says. “There’s lots of things we can do to help mitigate that tax liability.
”The worst thing you can do is do an exchange and then come in during tax time and dump it in your adviser’s lap and hope they can pick a tax liability,” he adds.
Listen to Paul Neiffer on "AgriTalk" as he shares an example of how farmers can properly use 1031 exchanges at AgWeb.com/1031-exchange