Defer Capital Gains Taxes When Selling a Farm or Ranch
When selling farms and ranches, owners may use 1031 exchanges to adjust their land holdings by replacing less productive farmland with higher yielding cropland. Farms and ranches can also be sold to transition into less labor intensive holdings including cash generating properties like triple net leases with CVS Pharmacy and Walgreens or oil and gas royalties. Often vacation properties are acquired for investment use that is limited to fourteen overnights per year of personal use then converted into primary residence after two years. Investment property can always be converted to personal use, such as a primary residence.
When selling farmland or ranches capital gains and recaptured depreciation taxes can be deferred when the investment property or acreage is exchanged for any type of real property held for productive use in a business or for investment. There are a number of 1031 exchange rules to be followed including:
- Engaging a Qualified intermediary to facilitate the 1031 exchange
- Same taxpayer requirement - the taxpayer who sells is the taxpayer who buys
- To defer the capital gains tax property of equal or greater value is acquired
- Replacement property must be identified by the 45th calendar day and acquired by the 180th calendar day post initial closing
- If selling to a related party, the property must be held for two years otherwise, the tax deferred is due.
- If buying from a related party, the related party must also be initiating a 1031 exchange and not cashing out.
When a primary residence is included in the farm or ranch sold, Section 121 provides a $250,000 gain exclusion per taxpayer while Section 1031 gain deferral applies to the land. This is known as a mixed use 1031 exchange.
If the intent is not to replace with real property, a Deferred Sales Trust allows the sales proceeds to grow under the guidance of your financial advisor while the capital gains tax is paid per a schedule the taxpayer determines.