When selling farmland or a ranch that has both a primary residence and land, it is important to consider the tax consequences of Internal Revenue Code Section 121 and Section 1031. Vacant land can be sold along with a primary residence, utilizing the $250,000 ($500,000 married filing jointly) exclusion given the property was owned and used by the taxpayer as the taxpayer’s primary residence for time totaling two years or more. The capital gain exclusion is available once every two years.
Farmland shares location as a common characteristic buyers associate with value. Contrary to popular opinion, not all farmland is experiencing a rise in the price per acre. According to the Federal Reserve Bank of Richmond’s latest survey of agriculture bankers in the Southeastern United States “found good farmland averaged $3,263 an acre during the third quarter – down 1.5 percent from the previous quarter and down 4.5 percent from a year earlier.” The survey noted “volatile feed prices continued to negatively impact livestock operators while the housing slump adversely impacted demand for lumber and nursery products.”
In the midst of the stagnating economy and fears of a double dip recession, U.S. farmland and cropland values as a whole continue to be bullish. Farmland owners who made the decision to sell their current holdings should consider 2 tax deferred strategies while taking advantage of the trend.
Multi asset 1031 exchanges apply to sales of apartments, motels, dry cleaners, laundromats, gas stations and variety of franchises including self storage facilities, convenience stores, fast food, automotive and technology service providers. Each has in common real and personal property that can be sold and capital gain and recaptured depreciation taxes deferred when real and personal property are replaced in an Internal Revenue Service (IRS) 1031 tax deferred exchange.
Farms and ranches are made up of real and personal property. Depending upon the intent of the owner, land can be sold in a 1031 exchange replacing with a variety of real property choices including real estate and possibly an asset that provides cash flow such as a triple net lease property with a tenant like CVS Pharmacy. In recent years, given the historically low capital gains rate of 15%, paying the tax was and is an option.