1031 Exchange Considerations for Farmers

Farmers can benefit greatly from 1031 exchanges of land. However, there are many important things to keep in mind if you are a farmer considering an exchange. In this article, we are going to discuss a few important considerations for farmers looking to exchange their property in a 1031 transaction.

Personal Property Not Allowed

The biggest change in the 1031 exchange realm this year is that personal property is no longer eligible for 1031 exchange treatment. This is a result of the Tax Cuts & Jobs Act that went into effect in early 2018. Thankfully, this act preserved like-kind exchanges of real estate, but it effectively axed exchanges of personal property. That means any items of personal property you own and use for investment or business purposes cannot be exchanged in a 1031 transaction. Here are a few personal property items that cannot be exchanged:

• Livestock

• Agricultural Equipment

• Tractors

Help Through the 1031 Exchange Process

At CPEC1031, we employ the best and brightest qualified intermediaries. With more than two decades worth of experience, we have the skills and expertise to handle even the most complex of 1031 transactions. From preparing paperwork, to helping you identify replacement property, we can guide you through every stage of the 1031 exchange process. Give us a call today to learn more about our 1031 exchange services and to get the process started with your exchange!

•  Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2018 Copyright Jeffrey R. Peterson All Rights Reserved

Reverse 1031 Exchanges of Agricultural Property

Exchanging farmland and agricultural property in a 1031 transaction allows you to sell your property in the most tax-advantageous way possible. In this article, we are going to discuss some tips for doing a reverse exchange of agricultural property.

Benefits of a Reverse Exchange

So why do a reverse 1031 exchange of agricultural property rather than a forward exchange? Well, both are perfectly legitimate ways of deferring taxes when selling your property, but a reverse exchange may be better suited to your particular situation. In a reverse exchange of farmland, the taxpayer purchases their new replacement property first and then subsequently sells their relinquished property within the 180 day exchange period. This is the reverse order of operations compared to a forward exchange. The benefit of doing a reverse exchange is that you can lock up your replacement property as soon as possible. This can be especially helpful when the market is hot and you’re competing with other buyers trying to find the perfect property for your situation. If you find a piece of farmland that perfectly suits your needs and you’re afraid it’s going to be snatched up before you can sell your relinquished property, then a reverse exchange is the name of the game.

Reverse Exchange Company

If you are considering a reverse exchange of your property, contact a qualified intermediary about your situation today. At CPEC1031, our intermediaries have more than two decades of experience facilitating exchanges of real property for clients throughout the Twin Cities, greater Minnesota, and around the country. Contact us today at our downtown Minneapolis office to walk through the details of your exchange and start deferring your capital gains taxes!

•  Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2018 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchange Case Study: Farmland Exchanges

Recently, a client came to us with the following situation:

I have a farm for sale - bare land, no buildings - that I would like to do a 1031 Exchange on if/when it ever sells. Can I exchange into ANY other type of Real Estate? 

Tax Code Changes

Per recent tax code changes, US real property may be exchanged for other US real property. No personal property (non-real property) may be exchanged as a result tax reform.

Both the Relinquished Property and the Replacement Property must be held for a qualified purpose (either for productive use in a trade or business or for investment).

Section 1031 States:

No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind which is to be held either for productive use in a trade or business or for investment.

IRS PUB 544 States:

There must be an exchange of like-kind property. Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. The exchange of real estate for real estate and the exchange of personal property for similar personal property are exchanges of like-kind property. For example, the trade of land improved with an apartment house for land improved with a store building, or a panel truck for a pickup truck, is a like-kind exchange.

IRS PUB 544 also States:

Real property. An exchange of city property for farm property, or improved property for unimproved property, is a like-kind exchange.

Indirect ownership of real property through an entity such as an ETF or REIT may not qualify, so talk to your CPA about this question. You should consult with your accountant about this because the rules are complex and may depend on how the transaction is set up.  Also, a DST or Delaware Statutory Trust may  be an option to consider as an alternative.

Minnesota 1031 Exchanges

At CPEC1031, our qualified intermediaries are proficient in all the complexities of section 1031. We can guide you through the process and ensure that your property meets all the necessary requirements for 1031 tax deferral. Give us a call today to talk about the details of your exchange with one of our qualified intermediaries. Our primary office is located in downtown Minneapolis, but we work with clients throughout the state of Minnesota, and across the United States.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2018 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchanges of Farmland

Farmers like to buy farmland. They know it, they understand it, and they feel comfortable 1031 exchanging into other farmland. But what do you do if the kids don't want to take over the farm and your farm has risen dramatically in value?

Cash-on-Cash Returns

Often the cash-on-cash returns from agricultural land pales in comparison to the cash-on-cash returns that you can get with a commercial property; not to mention the consistency and reliability of commercial rental returns that are not impacted by commodities markets, the weather, and potential changes for crop insurance.

So people that are getting out of farming may want to sell their farms at the top of the market and exchange that money tax-deferred into like-kind real estate that doesn't necessarily have to be more farmland, such as:

• a CVS drug store

• a Walgreens

• a Kentucky Fried Chicken

Or it could be some other commercial property that's going to generate a steady eddy stream of income for the taxpayer.

Advantages of a 1031 Exchange

The advantage of doing a 1031 exchange is that you can gain a certain amount of diversity and safety by taking your money out of the land and exchanging it into one, two, or three replacement properties that might be a different business segments (retail, industrial, commercial, medical) and also might be in different segments of the country geographically.

So I might buy an Arby's in Texas, and I might buy a hotel in California. The idea is that I want to spread my money out so I don't have all of my eggs in one basket and I've created for myself a steady stream of income during my retirement years. The Mantra is to defer, defer, defer…die. You want to pass these properties on to your heirs so that they can receive the inheritance and step-up in basis on these replacement properties.

• Start Your Exchange: If you have questions about 1031 exchanges of farmland, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Farmland Capital Gains & 1031 Exchanges

Recently, a client came to me with a question about farmland capital gains and their 1031 exchange. The lender they spoke with was concerned that they wouldn’t be able to transfer farmland capital gains into a NNN lease retail store with a 1031 exchange.  Specifically he was worried about the like-kind definition. So is there anything taxpayers need to be aware of in this type of situation? Great question.

Farmland Improved Property

Generally “unimproved” farm land may be exchange for other “improved” real property with buildings. 

Section 1.1031(a)-1(b) of the Income Tax Regulations defines like-kind as referring to the nature or character of the property and not to its grade or quality. One kind or class of property may not, under  hat section, be exchanged for property of a different kind or class. The fact that any real estate involved is improved or unimproved is not material, for that fact relates only or the grade or quality of the property and not to its kind or class. See https://www.irs.gov/pub/irs-wd/0404044.pdf

Most real property that is exchanged is 1250 property, with slow depreciation schedules.

Sometimes farmers have some 1245 property (that has faster deprecation) mixed in with the Relinquished Property that is sold such as cribs, grain storage bins, and silos.  If a high amount of the purchase price is allocated to the 1245 property, then that could trigger some gain unless this 1245 property can be matched-up with a sufficient amount of new 1245 in the Replacement Property in order to defer 100% of the gain.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges of farm property, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved