5 Things to Know About 1031 Exchanges

1031 Exchanges

If you are a farmer and/or landowner, your chances of being involved in the sale or acquisition of land is almost certain. As such, you are probably already familiar with a useful real estate tool known as a 1031 exchange. Put simply, a 1031 exchange is a deferment of the capital gains tax on the sale of land to a later date by purchasing more land, and is an exceedingly common practice that has been employed by landowners for years.

In more technical terms, “A 1031 exchange allows an investor to defer the recognition of capital gains when exchanging one appreciated investment property (the ‘relinquished property’) for another ‘like-kind’ investment property (the ‘replacement property.’)” It’s no secret that the capital gains taxes that are incurred as the result of the sale of property can be sizeable, and especially so if that land is left through inheritance—something that happens frequently for those in agriculture. Therefore, it is necessary to know your options, and clearly understand what a 1031 exchange in Nebraska entails.

Here are five things to keep in mind:

  • “Like-Kind” is used broadly. While it should be noted that 1031 exchanges are for real estate and not for personal use, like-kind exchanges may be surprisingly liberal in nature. Use caution, however, and be absolutely certain before engaging in an exchange that the two do, in fact, qualify as such.
  • You realize you need to utilize a 1031 exchange, but finding the replacement property can be difficult. For that reason, most exchanges are classified as “delayed,” “three party,” or “Starker” exchanges. In this type of exchange, you need a middleman to hold the cash after you “sell” your initial property, and who then uses it to “buy” the replacement property. In a delayed exchange, you must observe timing. Once the sale of the initial property occurs, the intermediary must receive the cash, and you must designate replacement property in writing to the intermediary within 45 days of the sale. Also, you must close on the new property within 180 days of the sale of the old property.
  • It’s useful to know that you can designate multiple replacement properties, usually stated as three by the IRS, so long as you eventually close on one of them. However, you may designate more properties if you are within certain valuation tests—in this case, as long as the replacement properties do not exceed 200 percent of the total fair market value of all the exchanged properties.
  • You may have cash left over after the intermediary acquires the replacement property, and if so, you will be taxed on that amount.
  • Remember to consider mortgages and other debt on your relinquished property, and any potential debt on the replacement property. For instance, if you don’t receive cash back, but your overall liability goes down, that will be treated as income and will be taxed as such.

1031 exchanges are a great investment tool for farmers and landowners in Nebraska. Are you looking to sell land, and are wondering about how a 1031 exchange would work for you? Contact a UFARM representative—we are glad to answer your questions and help you get started. UFARM offers a full range of Nebraska land management services, including real estate sales, rural property appraisals, consultations and crop insurance. UFARM has operated in Nebraska since the early 1930’s. Contact us today!

Source consulted:  Wood, Robert W. “10 Things to Know About 1031 Exchanges.” Forbes. Forbes.com LLC. 26 Jan. 2010. Web. 15 Dec. 2015