Using a Section 1031 Exchange to Defer Capital Gains Tax
Perhaps you have no family member or key employee to transition your farm or ranch to, but you're concerned about significant capital gains tax liability because of its appreciated value. If this concern has stopped you from selling these assets, you may wonder what options are available to you.
For many farmers and ranchers, real estate assets, i.e., land and buildings, are the largest portion of their estate. Farm land has historically been the most valuable. While there are many reasons to keep the asset, you may consider selling a portion of the real estate because of concerns that land values will have an impact on rents, property tax and estate taxes.
You may also want to minimize the efforts required to manage the asset directly, such as dealing with contracts and rent arrangements, liability exposure, etc. Lastly, you may feel you can get a better return on your investment elsewhere. In essence, converting a portion of farm assets may help you address tax concerns, as well as help you be positioned for greater flexibility to meet your personal financial and retirement objectives.
A Section 1031 exchange involves the exchange of some property for other properties. To optimize the advantages of such an exchange some very important underlying terms and conditions set forth by the Internal Revenue Service must be followed.
Section 1031 of the Internal Revenue Code allows an investor to reinvest the proceeds from a sale of an investment property into one or more "like-kind" properties while deferring federal (and in some states) capital gains tax on the appreciated amount. A 1031 exchange is not applicable for exchanges of inventory, stocks, bonds, notes, other securities or evidence of indebtedness, or certain other assets. Additionally, there are strict timelines to be adhered to with respect to identifying and closing on the replacement property. Most 1031 exchanges take place with agreements in place and with the assistance of a facilitator.
A 1031 exchange may include an acquisition in a Tenant in Common (TIC) investment, in which investors own an undivided fractional share of an entire 1031 property and share a pro-rata portion of the net income, depreciation, amortization and property appreciation. This type of arrangement may be a solution that meets the needs for cash flow and capital appreciation, as well as the desire to not have to be actively involved in managing the property.*
To learn more about how 1031 exchanges work, contact FBL Marketing Services, LLC, at 800-531-0830 to speak to an Advanced Markets Specialist.
*Cash flow and capital appreciation are not guaranteed.
