Three Issues to Consider When Selling Farmland

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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.

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