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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

1031 ExchangeAt some point during any farmer or landowner’s lifetime, they will likely be involved with the sale and acquisition of land. Deferring the capital gains tax on the sale of land to a later date by purchasing more land—in what is known as a 1031 exchange—is a common practice that has been employed for many years. Several proposals by the federal government to significantly alter the 1031 Section of the IRS code have many in the real estate business wondering about the future of 1031 exchanges, and how this might affect multiple industries, including farmers and landowners.

A 1031 exchange is a very useful tool for investors. In 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.’)” In most 1031 transactions today, the investor employs a qualified intermediary (QI) to facilitate the sale of the relinquished property to one party and the purchase of a replacement property from another party. The replacement property must be equal to or greater in value to the relinquished property. The capital gains are thus deferred to a later date, when the replacement property is sold or transferred with non-like-kind property.

As such, 1031 exchanges are not tax loopholes; they are merely a deferred payment of taxes. Commercial real estate expert Scott Saunders explains, “The essential logic is that the investor, in exchanging one appreciated property for another like-kind property, has not realized the gain inherent in the relinquished property. The investor has merely changed the form of his investment.” Thus, since no profit is realized in the transaction, there is no premise for taxation.

It is no secret that 1031 exchanges are friendly to investors, businesses and business owners, farmers, and landowners. The advantages of 1031 exchanges are numerous. They make sound business sense, helping investors grow, change locations, diversify and expand, thereby creating jobs, further financial opportunities and economic stimulus to a wide array of other economic sectors.

Consequently, it is troubling to many that the federal government is looking to alter—and in some cases, eliminate—1031 exchanges, in order to increase federal tax income. Two separate proposals, one by former Democratic Senator and current China Ambassador Max Baucus and another by US Rep. Dave Camp (R-MI), would eliminate all 1031 tax exchanges. President Obama’s latest budget proposal would limit the deferred taxes in a 1031 exchange to $1 million dollars per taxpayer per taxable year beginning January 1, 2015.

Of course, should these proposals pass, the effect would not, in fact, produce more federal tax revenue. In reality, the likelihood that investors would simply hold onto properties rather than sell without the ability to defer tax payment through 1031 exchanges would greatly increase. Accordingly, the beneficial economic ripple effects to other financial sectors would lessen as well.

Saunders urges taxpayers and voters to educate legislators on the many benefits that 1031 exchanges offer in order to put a stop to the potential elimination of 1031 exchanges.

Are you looking to sell land, and are wondering about how a 1031 exchange would work for you? Are you concerned about how these potential tax changes might affect you and your land? Contact a UFARM representative with your concerns—they are glad to help.

United Farm and Ranch Management (UFARM) is a Nebraska-based company devoted to meeting landowners’ needs. 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.

 

Sources consulted:  Saunders, Scott. “1031 Exchanges Face Uncertain Future.” Rebusiness Online. 06 May 2014. Web. 02 Sep. 2014.