Most people now know the benefits of a 1031 exchange. This type of property transaction allows you to postpone the payment of taxes which will take about 20-30% off the gain or loss of your property’s sale. Most people only associate 1031 property exchanges with commercial and residential properties. The exchange, nevertheless, also applies to agricultural properties.
Selling agricultural properties unlike TIC real estate, however, involves a range of assets. When taking part in this transaction, you should focus on all the assets you are selling for you to maximize the tax tools and capital gains you stand to benefit from in your deal. The “like-kind” replacement property which will apply to your transaction should be held in the productive use of a business or for investment, and its transfer should qualify as an “exchange.” The following are some of the “like-kind” properties which may be used in agricultural property transactions.
Buildings and Real Estate
The real estate assets on your agricultural property encompass the land and all improvements on it such as buildings. If workers occupy the buildings on your property on your land, they are considered property used for trade and qualify as ‘like-kind’ exchanges under 1031 transactions. If you are the one occupying the building, this is considered personal property and is non-exchangeable. However, it may still qualify for tax deferral if you prove that it is also partially for your farming business’ operation.
Harvested crops from your farm will not be considered like-kind exchange property in 1031 transactions. Unharvested crops, on the other hand, will be regarded as like-kind property if sold with the land to the same person at the same time provided you held the land for over twelve months for investment before the sale. Moreover, these crops should be considered real estate under the specific laws of your state.
Water and mineral rights are considered like-kind to a property’s fee interest by the IRS. These rights must, however, have no limit in their duration or amount for them to be considered like-kind properties. Certain mineral rights are also recognized as like-kind exchanges in 1031 transactions depending on their length and nature.
In 1031 transactions, only same-sex livestock is considered like-kind property. The livestock, in this case, should also not have been held “exclusively for sale” during the course of the agricultural business. Under the current IRS guidelines, the exchange of livestock in 1031 transactions has stringent guidelines, and without a qualified intermediary, it can be confusing.
Farmers and agricultural property owners are among the hardest working people nowadays, and they deserve a tax break when selling their properties. 1031 exchanges offer the tax break you need when selling your land and various assets on it. This is however not a guarantee for everyone dealing with agricultural land. Without a qualified intermediary and a 1031 transaction expert for guidance, you will find yourself facing the maximum taxes you are required to pay in the year of your property’s sale. This will significantly affect the finances of your property’s sale and may require you to put the purchase of a replacement property on hold.