One of the fundamental rules of a 1031 Exchange is that the properties exchanged must be of “like-kind”. Given the importance of this rule, understanding what qualifies as “like-kind” is imperative to using a 1031 Exchange to your advantage. If the transaction qualifies for Section 1031 Exchange treatment though, the capital gains tax obligation can be deferred, potentially saving a substantial amount of money that can then be re-invested.
Exchange Blog
Mineral Interests and 1031 Exchange
In most transactions for the sale of real property, capital gains taxes are levied on any realized gain as a result of the sale. One way to defer the payment of capital gains taxes is to enter into a Section 1031 Exchange instead of completing a conventional sale of the property. In order to qualify for 1031 Exchange consideration, the property exchanged must meet very strict guidelines, including the requirement that the property exchanged be “like-kind”. While the exchange of some types of real property clearly meet the Internal Revenue Service guidelines, determining whether other types of property interests qualify can be more complicated. For example, certain oil, gas and mineral interests are potentially eligible for Section 1031 Exchange treatment, while others are not eligible.
Foreign Investment in Real Property Tax Act (FIRPTA)
The Foreign Investment in Real Property Tax Act of 1980, or FIRPTA, is a federal law that applies to any disposition of real property by a foreign person. In general, FIRPTA requires that ten percent of the amount realized from the disposition of the property be withheld and remitted to the Internal Revenue Service after the closing on the property. Understanding how FIRTPA operates, when it applies, and what exceptions may be available is important for anyone involved in real property transactions.
Timberland Investment and Section 1031 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.
1031 Exchange: Who is Buying Farmland?
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.”
1031 Starker Insight
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.