Under the old law, farmers could trade-in farm equipment and not recognize gain on the trade. With the new law, farmers can only exchange real estate for real estate. Most farmers who sell farm real estate plan on rolling it over into other farm real estate. However, there may be times where rolling it over into a Delaware Statutory Trust (DST) may make sense.
A DST allows the farmer to invest in real estate with other investors. It is treated as a grantor trust which means the farmer will include their share of the property on their tax return, depreciate any basis in the property and then be allowed to roll over the gain again once the property sells. The farmer at the point of sale has the following options:
- Report the gain on their tax return and pay the tax,
- Roll over the gain into another DST, or
- Roll over the gain into farm real estate.
In order to have a valid deferred tax exchange, the farmer must identify property within 45 days of selling their real estate. In the real estate world, 45 days is not very long. Once the 45 day period is past, you can only purchase the property that is identified. Also, there are limitations on how many properties you can identify. The most common one is that you can list up to three properties with no issues. Next, you can list as many properties as you want as long as their value does not exceed 200% of your sales price of the property sold. The least common one is that you can list more than 3 properties with a value exceeding 200% but have to purchase at least 95% of that value.
Therefore, if the farmer has not found farm real estate within the 45 day period, listing a DST allows the farmer to roll over their gain into the DST. This keeps their tax deferral in place and allows the farmer to then roll over into farm land once the DST property is sold.
Another option is that farmers sometimes need to consider diversifying their assets. Back in 2007-2013 owning farmland was a great investment. Since 2013, not so much. A DST can invest in almost any type of real estate. This gives the farmer the chance to invest in (1) apartment buildings, (2) health care real estate, (3) retail, (4) self-storage, (5) industrial property, and (6) many other types of property. Currently, an owner of a DST would be looking at a cash-on-cash return of about 5-6% and any leverage that is placed on the property is non-recourse to the farmer (I don't know too many farmers that like to guarantee debt).
Most farmers will continue to use a tax-deferred exchange to roll over gain on farm real estate into other farm real estate. But for those farmers who can't find the right farm real estate or wish to diversify, not all is lost. A DST may make sense.