farmland

Farmland Auction Insights

Posted on | by Tom Gustafson | Leave a Comment on Farmland Auction Insights

Atlas 1031’s Andy Gustafson attended a farmland auction held by Schrader Auctions and shares his insights into the bidding process. He learned there are two types of bidders simultaneously accessing the value or price points. The individual bidder considers one or a combination of tracts while the whole bidder is analyzing price points for the whole or entire farm. Each has their value point they will not exceed. It is a fair and expedient process pitting the sum of the individual bids against bids for the whole.

In a large banquet facility located on the Boone and Hamilton County line, a couple hundred registered bidders and interested bystanders listened to veteran auctioneer Rex Schrader, CEO of Schrader Auctions, cover auction procedures. For the next two hours, a 681-acre farm parceled into thirteen tracts representing high quality cropland, fenced pastures, woodland and streams, recreation areas and ½ mile rows with good frontage and updated drainage would be the focal point of competitive bids for the whole and individual tracts.

The room was laid out with a large screen showing a map of the farm in parcels numbered 1 – 13. Next to the map was a spreadsheet, continually updated with the parcel number, bid, bidder’s number, and price per acre. To the left and right of the screen, large whiteboards were used to show the bids by parcel number, combination of parcel bids, bids for the whole and current sum of parcel bids. The auction team began their orchestrated movements starting with updating the whiteboard when Mr. Schrader opened the auction for a bid on tract number one.

“$300,000 …, now $325,000,”rang the call of the auctioneer. “Now $350,000 for a 75 acre tract with 60 acres high quality cropland and 15 acres nice woodland.” The tract has county drainage tile and new drainage improvements. Indiana farmland has been sold for $7,000 and higher per acre. The current $4,666 per acre bid would later be replaced with a winning bid of $480,000 or $6,400 per acre.

Schrader Auction agents walked the bidders’ tables, talking specifics with bidders and notifying  Mr. Schrader that they had a new offer. The spreadsheet and whiteboards were updated with the bid and the bidder’s number. The process would repeat itself over and over with individual bids, updates, combination parcel bids and ultimately, bids for the whole. It was a well coordinated event run by professionals that clearly understand the auction process. Mr. Schrader was helpful highlighting those undervalued parcels encouraging additional bidder consideration. When the whole parcel bid exceeded the sum of the individual bids, Mr. Schrader would suggest to the individual bidders to consider increasing their bids by $10,000, not to meet but rather exceed the whole bid.

I sat next to one of the eventual winning individual bidders. He came to the auction with financing and down payment in place to bid and not exceed his value point. When his combination parcel bid was exceeded, he would counsel with a Schrader agent to confirm his new bid would be sufficient to exceed the current bid. In the end, his bid was increased beyond his value point and he quickly placed another bid for a combination of two tracks he had walked the day before as a contingency tract. His intent is to build a home and possibly sell a portion of the land for residential lots. His tracts represented 38 acres with 14 acres cropland for hay and 24 acres woodland on both sides of a creek. What he bought for $4,800 per acre contrasts with the $25,000 per acre zoned R1 or residential asking price within eye site in Boone County, a northern suburb of Indianapolis.

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Farmland Auction 1031 Bidder Insights

Posted on | by Tom Gustafson | Leave a Comment on Farmland Auction 1031 Bidder Insights

The bidder’s position in the 1031 exchange cycle is one of the major factors affecting their bids behavior. Timing of the auction in relation to the 45th calendar day post old property closing can influence the bidder’s aggressiveness. Understanding the objective of a 1031 exchange and how it works should lessen the angst of competing bidders if the 1031 bidders are known. Ultimately, the bidding is not about the quantity of 1031 funds available but more importantly the bidder’s value point.

The 1031 Exchange Strategy

The 1031 exchange strategy allows for the deferral of the federal and state capital gains and recaptured depreciation taxes, which can represent 40% of the properties sales price. According to the Internal Revenue Code (IRC) Section 1031 “no gain is recognized when property held for use in a business or investment is exchanged for like kind property held for productive use in a business or investment.” Property refers to both real and personal property. The tax deferral serves as an interest free loan allowing for using those taxable dollars towards the purchase of a replacement property given the new property is equal to or greater than the property sold. The reward is that when the capital gains tax is ultimately paid, the risk of a higher tax rate is compensated for by either annual cash flow, a conservative appreciation or both on the replacement property.

What Affects the Exchangor’s Aggressiveness

Factors affecting the bidder with 1031 money, referred to as the Exchangor include:

  • Is the land adjacent to their existing property?
  • Quality of soil, history of crop production, topography, and water source
  • Has the Exchangor closed or in contract on their property?
  • If their property sold, is the auction before or after the 45th calendar day post old property closing?

Exchange Process

There are two types of exchanges, a forward and a reverse. In a forward exchange, which is the most common type, the old property is sold before the new property is purchased. In a reverse 1031 exchange, the new property is purchased before the old property is sold. A reverse is a bit more complex and expensive. The opportunity to defer the tax in the exchange can be lost if the old property does not sell within 180 calendar days. In addition, the farmer now owns two properties, and a Qualified Intermediary fee has been paid. The only reason the Exchangor may risk a reverse 1031 exchange is they have a buyer for their old property and a closing date scheduled. More importantly, they want to get the new property off the market now because it is undervalued or the Exchangor really wants the land.

Given today’s economy, many landowners would not favor taking a risk, and would prefer using a forward exchange. Consequently, they have two polar milestones:

  • Formally identify the replacement property to the Qualified Intermediary by the 45th calendar day post closing on the sale of their old or relinquished property
  • Close on the replacement property by the 180th calendar day post closing on the sale of their old property.

Knowing when the Exchangor closed on their old property and the sales price can provide valuable insights into their actions.

Sales Price of Exchangor’s Old Property

To determine the sales price, it is recommended to check with the Realtor, newspaper postings or County Clerk of Court web site. This will help to identify what the Exchangor needs to spend to defer their capital gains tax.

Closing Date of Exchangor’s Old Property

What was the date when the old property was sold? Once known, add 45 calendar days to understand where the Exchangor is in the identification milestone. If the auction date is before the 45th day, the Exchangor may be less aggressive bidding higher than their old property sales price because he may have time to locate other properties. If the auction date is after the 45th calendar day, the Exchangor has formally identified this property as one of potentially three properties (if using the three property rule) and will most likely be more aggressive.

Solution

The 1031 code defers the capital gains tax when property of equal or greater dollar value is acquired. If the Exchangor does not use all the exchange funds and debt retired on their old property, a tax is triggered on the difference. For example, a farmer sells land for $850,000. He will be looking to bid upwards of $850,000 for the new property. If the farmer spends $700,000, he will pay tax on the net difference less selling and purchase costs. If the competing bidders know the price and date the Exchangor’s old property was sold, they will be less likely to be frustrated at the price paid.

For those landowners who have 1031 funds to reinvest, there is no recourse but to hold the property for productive use in a business or investment. That implies but not limited to using the land for development, hunting, conservation and farming. If it is determined the property is used primarily for personal enjoyment, the IRS could question the 1031 exchange and potentially disallow the tax deferral resulting in an audit, penalty and taxes due.

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Farmland Auction 1031 Bidder Insights

Posted on | by Tom Gustafson | Leave a Comment on Farmland Auction 1031 Bidder Insights

The bidder’s position in the 1031 exchange cycle is one of the major factors affecting their bids behavior. Timing of the auction in relation to the 45th calendar day post old property closing can influence the bidder’s aggressiveness. Understanding the objective of a 1031 exchange and how it works should lessen the angst of competing bidders if the 1031 bidders are known. Ultimately, the bidding is not about the quantity of 1031 funds available but more importantly the bidder’s value point.

The 1031 Exchange Strategy

The 1031 exchange strategy allows for the deferral of the federal and state capital gains and recaptured depreciation taxes, which can represent 40% of the properties sales price. According to the Internal Revenue Code (IRC) Section 1031 “no gain is recognized when property held for use in a business or investment is exchanged for like kind property held for productive use in a business or investment.” Property refers to both real and personal property. The tax deferral serves as an interest free loan allowing for using those taxable dollars towards the purchase of a replacement property given the new property is equal to or greater than the property sold. The reward is that when the capital gains tax is ultimately paid, the risk of a higher tax rate is compensated for by either annual cash flow, a conservative appreciation or both on the replacement property.

What Affects the Exchangor’s Aggressiveness

Factors affecting the bidder with 1031 money, referred to as the Exchangor include:

  • Is the land adjacent to their existing property?
  • Quality of soil, history of crop production, topography, and water source
  • Has the Exchangor closed or in contract on their property?
  • If their property sold, is the auction before or after the 45th calendar day post old property closing?

Exchange Process

There are two types of exchanges, a forward and a reverse. In a forward exchange, which is the most common type, the old property is sold before the new property is purchased. In a reverse 1031 exchange, the new property is purchased before the old property is sold. A reverse is a bit more complex and expensive. The opportunity to defer the tax in the exchange can be lost if the old property does not sell within 180 calendar days. In addition, the farmer now owns two properties, and a Qualified Intermediary fee has been paid. The only reason the Exchangor may risk a reverse 1031 exchange is they have a buyer for their old property and a closing date scheduled. More importantly, they want to get the new property off the market now because it is undervalued or the Exchangor really wants the land.

Given today’s economy, many landowners would not favor taking a risk, and would prefer using a forward exchange. Consequently, they have two polar milestones:

  • Formally identify the replacement property to the Qualified Intermediary by the 45th calendar day post closing on the sale of their old or relinquished property
  • Close on the replacement property by the 180th calendar day post closing on the sale of their old property.

Knowing when the Exchangor closed on their old property and the sales price can provide valuable insights into their actions.

Sales Price of Exchangor’s Old Property

To determine the sales price, it is recommended to check with the Realtor, newspaper postings or County Clerk of Court web site. This will help to identify what the Exchangor needs to spend to defer their capital gains tax.

Closing Date of Exchangor’s Old Property

What was the date when the old property was sold? Once known, add 45 calendar days to understand where the Exchangor is in the identification milestone. If the auction date is before the 45th day, the Exchangor may be less aggressive bidding higher than their old property sales price because he may have time to locate other properties. If the auction date is after the 45th calendar day, the Exchangor has formally identified this property as one of potentially three properties (if using the three property rule) and will most likely be more aggressive.

Solution

The 1031 code defers the capital gains tax when property of equal or greater dollar value is acquired. If the Exchangor does not use all the exchange funds and debt retired on their old property, a tax is triggered on the difference. For example, a farmer sells land for $850,000. He will be looking to bid upwards of $850,000 for the new property. If the farmer spends $700,000, he will pay tax on the net difference less selling and purchase costs. If the competing bidders know the price and date the Exchangor’s old property was sold, they will be less likely to be frustrated at the price paid.

For those landowners who have 1031 funds to reinvest, there is no recourse but to hold the property for productive use in a business or investment. That implies but not limited to using the land for development, hunting, conservation and farming. If it is determined the property is used primarily for personal enjoyment, the IRS could question the 1031 exchange and potentially disallow the tax deferral resulting in an audit, penalty and taxes due.

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Three Issues to Consider When Selling Farmland

Posted on | by Tom Gustafson | Leave a Comment on Three Issues to Consider When Selling Farmland

Farmland is in high demand in many areas around the United States. Higher commodity prices, increased farm incomes and a reported 30% reduction in the supply of farmland for sale from historical numbers are driving farmland prices up. Although much of the demand comes from farmers, investors are also looking to farmland to diversify their holdings as return on farmland almost equals Standard & Poor’s 500-benchmark index’s return. Due to higher prices and increased demand, landowners are selling their assets and using profits to acquire more farmland or other cash generating real property. With a tax deferrment tool known as 1031 exchange, they can use taxable dollars as interest free loans for new acquisitions.

Three Issues to Consider When Selling Farmland

Over the years, Atlas 1031 has accommodated 1031 exchanges for many families and partnerships owning farmland. Some elect to purchase more farmland while others decide to sell and reinvest into a vacation property held for investment with minimal personal use. Arriving at the decision to sell can be and often is a difficult task. Securing the guidance of your CPA and estate attorney is important to achieving family and financial goals. Issues to consider when selling include:

  1. How can farmland be sold and provide a cash flow for the retiring farmer?
  2. If the goal is to sell and purchase additional land, how can taxes be minimized and new land purchased?
  3. What are the tax implications of passing on the farmland to your beneficiaries?
  4. Do you have a multi generational C corporation and the generation offspring do not want to continue the farm or ranch? Seek the input of an attorney to determine options. Added on December 8, 2011.

1031 Exchange

A 1031 exchange is a tax deferment tool that allows the landowner to sell and replace with any real property given the Internal Revenue exchange rules are followed. The tax obligation does not go away, but is deferred until the replacement property is sold. Those taxable dollars rather than being paid can be used towards the acquisition of the replacement property interest free. Farmland can be sold and exchanged for an investment property that generates cash flow, such as triple net lease, single tenant Tire Warehouse or CVS Pharmacy leased property.

Rather than selling, farmland can be passed on to the beneficiaries and estate taxes paid. The beneficiaries could elect then to sell at a stepped up basis without capital gains taxes. If sold later, they should consider the tax implications deciding whether to initiate a 1031 exchange or sell and pay federal and possible state capital gains taxes.

Finally, there is merit to paying the federal and state capital gains taxes given the federal rate is at a historical low rather than the likelihood of paying higher taxes in the future. However, if the intent is to minimize capital gains taxes, a 1031 exchange is an alternative that uses those taxable dollars towards purchasing replacement property that generates cash flow for tomorrow’s needs. It is recommended to discuss these options with your estate attorney and CPA.

Once the decision to sell is made and you want to learn more about a 1031 exchange, contact us for a free consultation.

We Can Help 

Atlas 1031 Exchange has been accommodating tax-deferred exchanges of all kinds for more than 17 years. We are fluent in the rules and regulations of IRC Section 1031 and able to help you navigate your exchange.

Contact us today to discuss any questions you may have. Call our office at 1-800-227-1031, email us at info@atlas1031.com, or submit your question through the online form at the top of this page.

Farmland Auction Insights

Posted on | by Tom Gustafson | Leave a Comment on Farmland Auction Insights

Farmland Auction InsightsAtlas 1031’s Andy Gustafson attended a farmland auction held by Schrader Auctions and shares his insights into the bidding process. He learned there are two types of bidders simultaneously accessing the value or price points. The individual bidder considers one or a combination of tracts while the whole bidder is analyzing price points for the whole or entire farm. Each has their value point they will not exceed. It is a fair and expedient process pitting the sum of the individual bids against bids for the whole.

In a large banquet facility located on the Boone and Hamilton County line, a couple hundred registered bidders and interested bystanders listened to veteran auctioneer Rex Schrader, CEO of Schrader Auctions, cover auction procedures. For the next two hours, a 681-acre farm parceled into thirteen tracts representing high quality cropland, fenced pastures, woodland and streams, recreation areas and ½ mile rows with good frontage and updated drainage would be the focal point of competitive bids for the whole and individual tracts.

The room was laid out with a large screen showing a map of the farm in parcels numbered 1 – 13. Next to the map was a spreadsheet, continually updated with the parcel number, bid, bidder’s number, and price per acre. To the left and right of the screen, large whiteboards were used to show the bids by parcel number, combination of parcel bids, bids for the whole and current sum of parcel bids. The auction team began their orchestrated movements starting with updating the whiteboard when Mr. Schrader opened the auction for a bid on tract number one.

“$300,000 …, now $325,000,”rang the call of the auctioneer. “Now $350,000 for a 75 acre tract with 60 acres high quality cropland and 15 acres nice woodland.” The tract has county drainage tile and new drainage improvements. Indiana farmland has been sold for $7,000 and higher per acre. The current $4,666 per acre bid would later be replaced with a winning bid of $480,000 or $6,400 per acre.

Schrader Auction agents walked the bidders’ tables, talking specifics with bidders and notifying  Mr. Schrader that they had a new offer. The spreadsheet and whiteboards were updated with the bid and the bidder’s number. The process would repeat itself over and over with individual bids, updates, combination parcel bids and ultimately, bids for the whole. It was a well coordinated event run by professionals that clearly understand the auction process. Mr. Schrader was helpful highlighting those undervalued parcels encouraging additional bidder consideration. When the whole parcel bid exceeded the sum of the individual bids, Mr. Schrader would suggest to the individual bidders to consider increasing their bids by $10,000, not to meet but rather exceed the whole bid.

I sat next to one of the eventual winning individual bidders. He came to the auction with financing and down payment in place to bid and not exceed his value point. When his combination parcel bid was exceeded, he would counsel with a Schrader agent to confirm his new bid would be sufficient to exceed the current bid. In the end, his bid was increased beyond his value point and he quickly placed another bid for a combination of two tracks he had walked the day before as a contingency tract. His intent is to build a home and possibly sell a portion of the land for residential lots. His tracts represented 38 acres with 14 acres cropland for hay and 24 acres woodland on both sides of a creek. What he bought for $4,800 per acre contrasts with the $25,000 per acre zoned R1 or residential asking price within eye site in Boone County, a northern suburb of Indianapolis.

Selling Farmland for Vacation Property Short Sale

Posted on | by Tom Gustafson | Leave a Comment on Selling Farmland for Vacation Property Short Sale

In this 1031 exchange, capital gains taxes were deferred when Indiana farmland was sold and replaced with a Florida vacation property short sale. The exchange started with the client finding Atlas 1031 following a Google lookup using keywords 1031 exchange and the client’s home town. “The Atlas 1031 web site came to the top of the search list. The detailed site provided the information and confidence to proceed with making contact.”

This was the client’s first 1031 exchange and he was looking mostly for information in the beginning. “Atlas 1031 was quick to follow up with a phone call to discuss my requirements.”

For those not familiar with a 1031 exchange, the Internal Revenue Service (IRS) allows for the deferral of capital gains and recaptured depreciation taxes when real and personal property held in the productive use of a business or for investment is exchanged for real and personal property held in the productive use of a business or for investment within 180 calendar days of the first closing. Given the intent when selling real estate, artwork, aircraft or equipment is to replace with like-kind property of equal or greater value, then the taxes are deferred indefinitely or until the replacement property is sold. There is no limit to the number of 1031 exchanges a taxpayer can initiate. In 2012, the Joint Committee on Taxation estimates $3.2 billion taxes will be deferred in 1031 exchanges.

“Where do you start?” “How do you trust a company to correctly follow the IRS requirements?” These were some of the questions the client wanted to answer. After the initial education of how a 1031 works, the client’s main concern focused on the timing of the transactions given the replacement property was a short sale. Fortunately, they had flexibility on when they sold and closed on the Indiana farm allowing them to coordinate the Florida vacation replacement property closing within the same week. Consequently, the exchange funds were wired directly from the farmland closing to the attorney’s office in Florida. “The short sale added another layer of complexity but in the end, the bank signed the notice of assignment of the sales contract and the exchange worked easily.”

Trust is a major issue when selecting a qualified intermediary. A qualified intermediary is required by the IRS when initiating a 1031 exchange. Atlas 1031 Exchange is a full time provider of qualified intermediary services with a Certified Exchange Specialist© on staff accommodating 1031 exchanges worldwide.

How did Atlas 1031 Exchange earn the client’s trust?

“Atlas is a very good communicator, both with timely email responses and return phone calls. In fact, in most instances, the phone call was answered on the first dial. Getting answers fast was my key to earning trust.”

Kurt and Mary Kroemer, Zionsville, Indiana