1031 Exchanges permit taxpayers to defer the taxes that arise from the sale of investment or business real estate. An exchange is a powerful tool for those involved in agriculture such as farmers, corporate farm owners, ranchers, institutional investors, and individual investors.
Structuring a transaction as a 1031 Exchange allows a taxpayer to reinvest 100% of the gains from the sale into new real estate opportunities by deferring taxes that could be up to 30% to 40% of the gain. The taxes that may be deferred include capital gains, state tax, net investment income tax (NIIT), Affordable Care Act tax, and, if applicable, depreciation recapture tax.
Properties that qualify for tax deferral include farms, ranches, raw land, and mixed-use property comprised of land with a primary residence. Interests in real property such as oil, gas, mineral rights, and water rights may also be exchanged.
We see taxpayers in the agriculture community utilizing 1031 Exchanges to improve and expand operations, to move into acreage more suitable for productive agricultural use, or to dispose of property/operations and transition into other Like-Kind eligible property such as apartments, industrial, or even passive investments.
Agriculture 1031 Exchanges include:
Farms, Ranches, Raw Land and Agricultural Land
Farms, ranches, raw land, and farmland are all eligible for 1031 tax deferral.
Mixed-Use 1031 Exchanges are used when a portion of the property qualifies as property held for use in a business or investment while the other portion is a primary residence. When selling a farm or ranch that includes a farm or ranch house, the personal residence can be separated from the total farm sales price, and the balance can be sold as property held for use in business or for investment. The personal residence may qualify for a $250,000 single /$500,000 married exclusion on the gain under Section 121 of the Internal Revenue Code (IRC), while the land portion including ranches, farms, raw and agricultural land would be subject to Section 1031.
Other Interests in Real Property
Certain interests in real property, such as oil, gas and mineral rights, water rights, easements and conservation easements, timberland and raw land, unharvested crops, fee interests wind turbines, and leasehold interests may be exchangeable for a fee interest in real property such as land, apartments, industrial, etc. The IRS generally looks to State law as a relevant factor in determining whether the interest in the property is treated as real property that qualifies for Section 1031 tax deferral or as personal property. Courts generally look to the underlying nature of the intangible property rights. If the right is perpetual, such as an easement or a royalty interest, it is generally real property for Section 1031 purposes. In states that treat water rights as real property interests, perpetual water rights are like-kind to a fee interest and may be exchanged for other real estate. Click here for more information.
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Other Interests in Real Property and Mixed Use Exchanges
Safety and Security for Exchangers
The Role of the Qualified Intermediary
Opportunities of the 1031 Exchange
Top 5 Challenges to Avoid in a 1031 Exchange
IPX1031 – Your Agriculture 1031 Solution
IPX1031 is your Agricultural 1031 solution with offices and teams across the country. IPX1031 is the largest most established 1031 Qualified Intermediary in the United States. As a wholly owned subsidiary of Fidelity National Financial (NYSE:FNF), a Fortune 500 company, IPX1031 provides industry leading security for your exchange funds as well as considerable expertise and experience in facilitating all types of 1031 Exchanges. Taxpayers’ funds are held in segregated accounts using the Exchanger’s taxpayer identification number. Our nationwide staff, which includes industry experts, veteran attorneys, and accountants, are available to help you and your legal and tax advisors for your upcoming transaction.