As many farmers know, there isn’t always a next generation to pass the farm down to.
Your kids may live out of state, happily pursuing careers as doctors, lawyers and professors. They have fond memories from their childhood on the farm fondly but won’t be taking over ownership, and you’re ready to slow down and retire. So, you collectively decide selling the farm is the best option for everyone.
The problem here is that in most cases, the sale will generate a significant amount of capital gains tax, which is where Farmers First Trust can help. The company’s principal, Mike Gustafson, recently joined the Top Producer podcast with Farm CPA Paul Neiffer to explain the process.
“What we tell the farm family is to go ahead and get a farm sale in place, but what you need to have in the purchase contract is an approval that a Section 453 transaction can be done at the request of the buyer and seller,” Gustafson says.
Here’s how Farmers First Trust uses the Section 453 tax code to defer capital gains tax on a farm sale:
- The title of the sale goes directly from the seller to the buyer.
- The funds of the sale go to Farmers First Trust.
- The family takes out a loan with an investment bank, and a loan is initiated to them four to six days after closing for up to 99% of the net sale.
- After a period of time chosen by the seller with the advice of their CPA (most commonly 30 years), the final 1% of the sale is released and then the capital gains tax will be due.
“In 30 years, $1 today at 3% inflation, is going to be worth about 44 cents,” Gustafson says. “They’ve had the opportunity to maybe double or triple that money over the course of those 30 years.”
Why Use This Method
If this seems complicated, you’d be right. Neiffer cautions this method isn’t right for every family, but it does have its advantages.
“This is something that you have to be in the right situation in order to take advantage of it,” Neiffer says. “It can be a little bit more difficult than a 1031 but again, a 1031 also has its drawbacks. You only have up to 45 days to identify, typically up to only three properties, and then you only have 135 days after that, or 180 days total, to actually close on that property. This allows you to defer that maybe three years down the road, and when you’ve identified property you can just go buy it with the cash that you got from this 453 transaction.”
Gustafson adds, “They can make their own decisions on what they do with the cash before they would make that purchase. That gives them a lot of flexibility, but also a lot of responsibility. So, it’s not for everybody, but in those cases where it does work for them, it’s extremely powerful.”
