As most people acquainted with 1031 exchange transactions know, a 1031 exchange can be used to defer capital gains taxes on the sale of virtually any “like-kind” real property interest. “Like-kind” real property is any property the taxpayer owns or intends to acquire for investment or productive use in a trade or business. Many times, the focus is on commercial, light industrial, office or residential properties, but a significant number of 1031 exchanges involve farm, ranch, and other agricultural properties.
Ag-Related 1031 Exchanges
In the past 40+ years in the transactional real estate and 1031 exchange arenas, we have witnessed Ag sector taxpayers increasingly use 1031 exchanges for a variety of reasons. The typical example is the sale of unproductive property or property not suited to an existing Ag operation and use of the exchange funds to acquire another more productive property or property that otherwise improves operational efficiencies.
Another expansion of opportunities afforded by a 1031 exchange is the sale of agricultural land or water rights, timber rights, oil and gas and mineral rights not necessary for farm or ranch operations and exchanges into other real property interests. Sometimes this type of transaction affords a farmer or rancher the opportunity to develop an in¬come stream not dependent on commodity prices or not subject to the vagaries of the agricultural economy.
Many agricultural landowners have sold perpetual easements or long-term leasehold interests (30+ years in duration) for the installation of wind power and solar power generation facilities on portions of their farms or ranches that are not integral to crop or livestock production. There are also increasing opportunities for farmers and ranchers to sell conservation easements to private conservation organizations or government entities such as the U.S. Department of Agriculture and use the cash proceeds to exchange into other real property interests.
We have also witnessed many situations in which the current generation of owners who have succeeded to multi-generational farms and ranches are faced with the reality that there is no next generation to work the land and livestock 24/7/365 days a year while facing fluctuations in the economy, disease, predators, drought, fires and other natural disasters. Fortunately for those folks, there are always buyers interested in agricultural land and the aging sellers can exchange out of a sale into other types of income-producing property. For the first time in their lives, those diverse income streams support the retirees independently of the agriculture markets.
Investors Targeting Agricultural Properties
On the other side of the equation, there are many investors who have begun to realize the benefits of investing in agri¬cultural property. Though the return on investment is not as high as certain types of commercial, office or residential rental property, pastureland, which is in short supply for livestock producers, provides a steady cash return and an upside in appreciation in value. Some Ag property buyers are developers who see another higher and best use for property that has historically been used in agribusiness.
Many agricultural investors are also investing in farmland which has heretofore been in dry land crop production or pastureland but has the capacity for increased production and profitability. Those producers can marshal underutilized water resources and, with enhanced irrigation systems and farming practices, convert dry land farms into other production such as row crops, vineyards, etc. The profitability of the land can also be changed with the introduction of organic crops which bring higher prices at the marketplace. With each of these modifications there is a corresponding appreciation in value of the land.
Don’t overlook the possibilities available to taxpayers in exchange transactions involving agricultural real estate. If you have any questions about these types of transactions, Accruit has a robust team which specializes in agribusiness real estate transactions, and we are happy to provide you with the expertise to successfully complete these types of exchange transactions.
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified A person acting to facilitate an exchange under section 1031 and the regulations. This person may not be the taxpayer or a disqualified person. Section 1.1031(k)-1(g)(4)(iii) requires that, for an intermediary to be a qualified intermediary, the intermediary must enter into a written "exchange" agreement with the taxpayer and, as required by the exchange agreement, acquire the relinquished property from the taxpayer, transfer the relinquished property, acquire the replacement property, and transfer the replacement property to the taxpayer. Intermediary , and as such does not offer or sell investments or provide investment, legal, or tax advice.