Smart Farmland Portfolio Adjustments: 1031 Tax Deferral Strategy

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Higher farmland prices lead to farmers and investors selling and repositioning their land holdings for farmland with higher yields, acquiring tracks adjacent to current holdings or diversifying their mix of cropland in another state. Smart land owners use 1031 exchanges to sell their assets and replace with holdings of equal or greater value deferring the capital gain until the replacement property is ultimately sold. 1031 exchanges provide them with an indefinite interest free loan for use towards acquiring farmland or any real property generating annual cash flow in addition to appreciation.

Pro Farmer cites land pro Murray Wise, CEO of Murray Wise Associates, LLC, discussing the current farmland boom and enhanced liquidity for investors. “Farmland has always been a long-term investment, and it probably always will be. But because agriculture land has become an important component of many investment funds and individual portfolios, there is now a ready market made up of local farmers and outside investors alike. This makes it possible to diversify a farmland portfolio by region, crop, quality and other criteria.”  To see the entire article, go to http://bit.ly/mWw0Es.     

Farmers and their financial advisors should consider the benefits of 1031 exchanges. The major benefit is the indefinite tax deferral of federal and state capital gains taxes. The challenge is a replacement property must be located and acquired within 180 calendar days of selling the old property. There is a risk that the properties identified cannot be purchased due to inability to secure financing or signing a purchase agreement. However, with proper planning and the help of farm brokers, replacement property can be purchased within the time line.

Recent Farmland 1031 Exchanges

Atlas 1031 has recently accommodated exchanges with farmers in Southern Indiana and Kentucky that resulted in farmland being sold and vacation properties purchased in Florida. The vacation properties are held as an investment with no more than fourteen overnights of personal use per year. Overnights for maintenance purposes are not counted towards personal use. Family member use is either counted towards the fourteen overnights or fair market rent is paid.

Farmers and investors selling their land assets and replacing with farmland of equal or greater value can either pay the capital gains tax or defer the tax obligation in a 1031 exchange using those other wise paid out tax dollars towards owning more farmland. It is recommended that you review with your accountant whether this makes sense. Atlas 1031 Exchange has helped farmers and investors defer nearly $23,000,000 in taxes. For more information, contact our office at 850.496.0090 to talk to the Certified Exchange Specialist about your tax deferred exchange strategy.

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