The 1031 exchange continues to provide farmers with options when selling farmland. Farmland demand, though waning, continues to support $8,716 per acre in Iowa, representing a 5.1 percent increase over 2012. The majority of farmland is acquired by existing farmers; however, large investors, such as Swiss bank UBS and financial services firm TIAA-CREF, actively seek bargains. When a farm is sold, federal and state capital gain taxes are imposed. Those taxes are dependent upon the state capital gain tax rates and adjusted gross income of the entity selling and may represent upwards of 40 percent of the sales price. An option to consider is a 1031 exchange or a deferred sale trust.
1031 Exchange
Section 1031 of the Internal Revenue Code allows the titleholder to defer the federal and state capital gain tax when selling and replacing with “like-kind” property. Land is the primary type of property sold that can be replaced either with other real property such as land, commercial or a vacation property which can later be converted to a primary residence. 1031 exchanges are initiated for a variety of reasons, including relocation replacing farmland with higher yielding land.
Initial 1031 Exchange Steps
Prior to placing the farm on the market, visit with your CPA to understand the tax consequences of the sale. If the intent is to replace the farm with other real property, then talk with a Qualified Intermediary or QI about a 1031 exchange. Using a QI to accommodate the 1031 exchange is required with the exception of a two party transaction where both you and the seller want each other’s property. A QI cannot be your local attorney or CPA (disqualified person) who has acted as your agent within two years of the sale, unless the attorney or firm provided real estate closing services. The QI’s role is to provide agreements supporting the intent to initiate a 1031 exchange and hold the net proceeds of the sale for use towards the replacement property.
1031 Exchange Rules
Once the old property is sold, two timeframes are initiated. Replacement property identification must be submitted to the QI no later than 11:59 PM of the 45th calendar day post-closing. The replacement property must be acquired by the 180th calendar day post-closing. The replacement property must be purchased using all the net equity from the relinquished sale in addition to having equal or greater debt to what was retired on the old property; otherwise, equity or mortgage boot occurs, triggering a tax. The titleholder who sells must be the titleholder who purchases the replacement property. To review additional rules, go to the Atlas 1031 Exchange website and read 1031 Exchange Rules and Requirements.
Deferred Sales Trust
If the decision after visiting with the CPA is not to acquire replacement property, yet defer the capital gain taxes, then a Deferred Sales Trust or DST may be the right strategy. A DST does not require the purchase of replacement property; rather the proceeds are invested per your direction in securities and annuities in a trust created for your benefit. You determine when and how much of the principal you want to receive annually. Earnings can be received, leaving the principal alone. Capital gain taxes are paid in the year principal is received.
A complimentary illustration can be created to help determine whether a DST makes sense. A follow up phone call is scheduled to discuss the illustration outcome, questions and next step. To learn more about a DST, download this PDF.
Ask a question about a transaction you are considering, click on the button at the top of the page to receive a response from our team.
We Can Help
Atlas 1031 Exchange has been accommodating tax-deferred exchanges of all kinds for more than 17 years. We are fluent in the rules and regulations of IRC Section 1031 and able to help you navigate your exchange.
Contact us today to discuss any questions you may have. Call our office at 1-800-227-1031, email us at info@atlas1031.com, or submit your question through the online form at the top of this page.
