The new tax law is providing an option for farmers who sell property at a gain to roll over the gain (not the total sales price) into a Qualified Opportunity Zone Fund. There is really not much details on these opportunities yet, but the IRS released earlier a listing of all of the counties that qualify in the US to set up these funds (all 383 pages).
It appears that if a farmer (or any taxpayer) sells property with a gain and the invests in one of these qualified funds the amount of the gain, the tax is either deferred or in some cases partially wiped out (if held for at least five years) or completely eliminated (if the investment is held for at least 10 years). This can be an advantage of a typical 1031 exchange since the farmer only needs to reinvest the gain amount, not the total sales amount.
To take advantage of the new law, the farmer must:
- Sell property for a capital gain (equipment sales would not qualify),
- It must be sold to an unrelated party (can not sell to son as an example),
- After the sale, the farmer has up to 180 days to reinvest the gain into a qualified fund,
- The qualified fund must invest at least 90% of its funds into business property in any of these "qualified zones".
As an example:
Assume Eric has farmland that he bought for $1 million and he now sells it for $2 million. Under Section 1031, he has to purchase replacement property worth $2 million to defer the gain. With an Opportunity Zone Investment, he only needs to spend $1 million and can use the other $1 from the sale for any purpose.
However, like anything that sounds too good to be true, there may be some catches to this type of investment as follows:
- The requirement is for investment in lower-income areas.
- Is this a good investment?
- What will the fees be on these investments?
- Farmers will no longer be in control of their asset.
- How long does the money need to be invested?
- How liquid is the investment?
- How do farmers get their money back?
Until these and other questions are answered and fleshed out, there is not much we can do yet. This is just to give you a heads up that there are other opportunities for deferring gain when you sell certain farm land and other property.
I could easily see certain funds being set up to invest in farmland (a substantial portion of these counties are in the bread basket of America). This would allow farmers to roll over their gain into farms and still keep their original investment. As long as they keep their money in the fund for at least 10 years, it will be tax free.