There are many opportunities for Exchangors who own agricultural land to take part in 1031 exchanges. Whether it be farmland or oil, gas and mineral rights, there are many options to consider for individuals who may also be looking to exit residential or commercial real estate.
Agriculture represents many types of 1031 tax deferral eligible properties and applications, including:
- Farmland Exchange – farms and ranches
- Mixed Use – primary residence and land
- Oil, gas, mineral and water rights
Smart farmers and ranchers upgrade or replace holdings in agriculture with other property by using 1031 tax deferred exchanges. Funds resulting from savings on capital gains taxes represent an indefinite, interest free loan for acquiring higher yielding investments. Knowing what property can be exchanged and in what time frame will help you and your advisors take advantage of the tax deferment strategy and avoid potential risks.
Farmland Exchange – Farms and Ranches
When selling farms and ranches, 1031 exchanges are utilized by property owners to adjust their land holdings by replacing less productive farmland with higher yielding cropland. Farms and ranches can also be sold to transition into less labor intensive holdings, including cash generating properties like triple net leases. Capital gains and recaptured depreciation taxes can also be deferred when the investment property or acreage is exchanged for any type of real property held for productive use in a business or for investment.
Mixed-Use Property
Mixed use 1031 exchanges are conducted when there is a portion of the property that qualifies as property held for use in a business or investment while the other portion is a primary residence. Under Section 121 of the Internal Revenue Code (IRC), the personal residence qualifies for a $250,000/$500,000 exclusion on the gain depending on how you file your income taxes.
Ranches, farms and duplexes are examples of mixed use properties. The residential portion is typically defined as that portion of the yard around the personal residence where the grass is cut during the growing seasons.
Section 121
According to the IRC Section 121, the owners of the home are each allowed a $250,000 exclusion for both the husband and wife when filing a joint return given during a five year period ending on the date of the sale or exchange, the home served as the taxpayer’s primary residence for at least two years. The Section 121 exclusion may be utilized once every two years. Those taxpayers who, for reasons of changes in employment or health fail to meet the two year use requirement, may take a prorated fraction of the $250,000 per taxpayer exclusion.
Example
When a farm is sold that includes a farmhouse and the taxpayer meets the personal residence use requirements, the personal residence is separated from the total farm sales price with the balance sold as property held for use in business or for investment. If the taxpayer wishes to defer the gain and purchase replacement property, a 1031 exchange is initiated. These types of exchanges can be complicated, the engagement of a CPA is highly recommended
If you are considering a 1031 exchange of agricultural land, Atlas 1031 provides the accommodation services compliant with Internal Revenue Code Section 1031. Click below to begin a consultation or call our office at 1 800 227 1031 to discuss your agricultural 1031 exchange.
