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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.

 

 

 

Estate Planning: Successful Transferring Land to the Next GenerationWhen it comes to land management, one aspect that many landowners often put off for “tomorrow” is planning their estate’s transfer to future generations. However, estate planning is one of the most important actions landowners can take to ensure that one of their greatest assets is handled in a smooth manner once retirement age is reached or in the event of unexpected death or injury. It is essential for all parties involved to know what to expect, and having a plan in place offers peace of mind for both benefactors and those who will inherit land in the future.

There are many factors that must be taken into account when estate planning. Most obviously, experts emphasize the importance of having a legal plan in place, no matter how “settled” the land’s future is among the family. If there isn’t an actual legal document outlining the transfer, the state has the authority to allocate the assets according to state law. Having an estate plan that both outlines the distribution of assets as well as addresses business organization issues is essential for the successful transfer of the land to the final beneficiaries.

When estate planning, it is important to know how best to allocate farm ground among on-farm and off-farm children. Many initially conclude that the most equitable solution is to divide assets equally among all children. However, this avenue fails to take into account the difficulty the on-farm child would have in having enough money to buy-out his siblings, and often results in the land having to be sold to an outside party. Estate planning can address this situation, and allow the family farmland to remain in the family, as well as for all children to benefit as well.

In addition to the transfer of ownership, good estate planning helps reduce and avoid unnecessary taxes. Here it is especially important to have a trusted and competent advisor who is well-versed in tax law to avoid the considerable transfer taxes that can be incurred if not overseen carefully.

An estate plan also addresses many other key issues. It ensures practical ways to generate retirement income. It addresses how a spouse will be supported in the event of an unexpected death or injury, and covers medical and/or funeral costs. It also provides ways to secure a solid financial future for the next generation, including living and educational costs.

Experts agree: It’s never too early to establish an estate plan. In fact, waiting until retirement age can limit the ability to address tax concerns that may arise for heirs should they suddenly find themselves inheriting a large portion of land or other farm-related asset.

Ideally, estate planning is revisited often, since tax laws change frequently, and other factors such as land values can change greatly from year to year. It is important that landowners have trusted advisors to work with through the years in order to help them make these important decisions and to decide how best to manage the transfer of assets to the next generation.

United Farm and Ranch Management can provide complete solutions for your land.  Whether you need assistance with day-to-day management or long-term planning, our farm mangers can help.  Contact UFARM today for a free consultation.

“Don’t sell the farm,” or “I wouldn’t bet the farm on it,” are well-known idioms, and for good reason: They are a very fair representation of the high stakes that accompany such a venture. Over the last decade in Nebraska, with a growing number of farmers and landowners at an advanced age, knowing how to go about selling their farming enterprises or passing them down to their children is fraught with difficulty, and there are many issues farmers must take into account when going about estate planning and passing along their life’s work to the next generation.

Selling the Family Farm

One such issue that must be taken into account is quite obvious, but often overlooked: Do the children actually desire to carry on the family farm? Often, this fact is simply assumed, and parents make arrangements early-on, only to find out too late that the sons or daughters have very little interest in farming. If this is the case, it is in the best interest of all involved that they hire a professional farm management company or sell the asset to an interested party, so that the money is able to benefit the family and allow them to pursue their own aspirations.

Many experts advise that parents sell—rather than gift—the farm to their kids. This ensures that the kids do, in fact, desire to farm since they are buying it with their own capital. This way, there is “skin in the game,” and the farm benefits as a result.

Perhaps the largest factors affecting the sale of farms are the tax consequences. Navigating the myriad federal and state capital gains, estate and inheritance taxes is tricky. Inheritance taxes, aka the “Death Tax,” can be an especially difficult tax to handle, especially for small businesses and for family farmers and ranchers. Often, those on the receiving end of farmland from the previous generation are forced to sell that land in part or whole just to pay the taxes. Nebraska is one of only six states nationwide that has a separate state inheritance tax, so Nebraska farmers must contend with this extra tax as well. Experts emphasize the importance of seeking sound legal counsel as well as to obtain advice from those with expertise in farm management in order to minimize the often crippling tax burdens that can accompany the inheritance of the family farm.

Above all, it’s important for farmers to have a plan. It’s never too early to start planning one’s own future business succession, and it’s simply another part of farm management.  If working with a farm  management company, have copies of reports sent to adult children, so they can learn about the farm before the parents are gone. A lack of planning can put huge amounts of stress on families, and even sometimes tear them apart due to bickering among siblings about what to do about the farm or land that they’ve inherited, in part or whole. This plan will need to be reviewed often, and perhaps will change many times due to varying outside factors, but at least there will be a plan in place to guard against such instances.

If you need assistance managing your farm or transitioning your land for the future,  please don’t hesitate to contact us at United Farm and Ranch Management .