Over the past 17 years, we have had the pleasure of guiding thousands of Exchangors through the 1031 Exchange process. Our Blog draws from that experience and includes content ranging from the basics of an Exchange for first time Exchangors to detailed commentary on complex exchanges for the expert investor. If you do not find the topic or specific question you are looking for, reach out to us via email at info@atlas1031.com or call our office to speak with our team at 1 800 227 1031.
In the normal course of business, when you sell a property that has appreciated in value, the gain is subject to federal capital gains taxes according to the Internal Revenue Code as well as subject to state capital gains taxes pursuant to individual state tax laws. The sale of an asset may also be subject to depreciation recapture tax. Both of these potential tax obligations can be deferred if the transaction qualifies for a 1031 exchange.
Section 1031 is a useful section of the tax code that allows a taxpayer to defer taxable gains on a property by using it as an exchange rather than a simple sale. In order to successfully fulfill a 1031 transaction, you need to follow the specific 1031 exchange requirements. The 1031 exchange rules are very precise and need to be followed exactly in order to get the tax deferred exchange.
As a general rule, when you sell property and realize a profit from the sale, the gain is subject to capital gain taxes by the federal government as well as by many state governments. One way to avoid the immediate payment of capital gains taxes is to defer the payment through a Section 1031 exchange. In order for a transaction to qualify as a 1031 exchange, the transaction must be for “like-kind” property. When the property in question involves a timberland investment, the definition of “like-kind” can become less than clear.
Farmland shares location as a common characteristic buyers associate with value. Contrary to popular opinion, not all farmland is experiencing a rise in the price per acre. According to the Federal Reserve Bank of Richmond’s latest survey of agriculture bankers in the Southeastern United States “found good farmland averaged $3,263 an acre during the third quarter – down 1.5 percent from the previous quarter and down 4.5 percent from a year earlier.” The survey noted “volatile feed prices continued to negatively impact livestock operators while the housing slump adversely impacted demand for lumber and nursery products.”
The modern day delayed 1031 exchange, often referred to as a Starker exchange, has its roots back at the turn of the 20th century when T.J. Starker began investing in second-growth forest in Oregon. By the 1960s, T.J.’s son Bruce was part of the family business. T.J. and Bruce were able to purchased second-growth forest at a very low cost basis. As the forest land began to regrow, the value of the land increased substantially. Selling the land outright exposed the Starker’s to substantial capital gains taxes. Section 1031 of the Internal Revenue Code, which allowed a capital gains deferral for like-kind exchanges, had been in place since 1921. The problem was that up to that point, Section 1031 had been interpreted to apply only to a simultaneous exchange of like-kind property. Not surprisingly, this was often difficult to accomplish.