Tax benefits of using 1031 exchange for farming

With rapid increase in land prices for ranchers and farmers, the 1031 exchange could be a tremendous opportunity to save on taxes. It allows a taxpayer to sell property and purchase other without recognizing capital gain tax on sale.

You may also have heard the term 1031 Exchange, but are not sure how it works? Simply, it’s a like-kind exchange, meaning it is the swap of one business or investment asset for another. According to this section, any type of investment property can be exchanged for another. Of course, there are some tax implications that one needs to consider. It doesn’t allow one to exchange the asset “tax-free”, but in some cases, you may defer paying capital gain taxes on an investment property when it is sold as long as when other “like-kind” property is purchased. In order to avoid taxes, it is important that the net market value and equity of the property purchased is same as or greater than the sold property.

Exchanging with other like kind property

1031 exchangeallows for real property held for use in the investment, business or trade to be exchanged for other like-kind property. This also means that the disposition of the farmland and subsequent purchase of new investment can be virtually tax free. Recently, was involved in an exchange of farmland where approx 100 acres of land was sold at a fair market value of $11,000 per acre and exchanged into the parcel that was more advantageous for the farming use. This means all the sales proceeds were invested into the new land where not only the tax was deferred but more profitable crops could be grown there.

There are other opportunities available for farmers in deferring the sales on their land sales as per 1031 farming exchange. Some of the choices include:

  1. If there is a homestead on the property, the house can be separated to take the advantage of Section 121 home sales rules.
  2. There are some states that consider water rights real property and these rights can be changed further for income producing real estate property.
  3. Certain land has the mineral rights which can be exchanged as there are separate deeds on property.
  4. Unused land with timber or forest can be exchanged for other real estate property.

Agriculture represents many types of 1031 tax deferral eligible properties like:

  • Farmland exchange –farms and ranches
  • Mixed use – primary residence and land

Smart farmers and ranchers can upgrade or replace the holdings in agriculture with other property by using 1031 tax deferred exchanges. Know what property can be exchanged and in what time frame will help the farmers and advisors to take advantage of tax deferment strategy.

Farmland exchange

This is the best 1031 exchange from property to land. When selling farms or ranches, 1031 exchange is utilized by the owners to adjust their property by replacing less productive farmland with the higher productive one.

Mixed use property

These exchanges are conducted when there is a portion of property that qualified as a property held for use in the business or investment while the other is primary residence.

If you are considering 1031 exchange for farming, 1031 sponsors  offers the best options and advisory services to make the purchases beneficial. It will help you to defer taxes and have more to make investment. While 1031 exchange is useful and a valuable tool, the rules and regulations surrounding their usage are complex and it is always important to consult the tax and investment professional to make the final decision. For the best professional services, contact to know more about investing.

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