Investors, from non-operating landowners to farm families, worry they’ll lose wealth to capital gains taxes upon the sale of real property.
With adequate planning and guidance, land brokers can help farm and landowners avoid and delay the incurrence of taxes and maintain wealth.
What is a 1031 Exchange?
Plain and simple: a 1031-Exchange is the sale of real property performed with the intent and end result of acquiring a ‘like-kind’ property. By exchanging the property for one of similar character, landowners are able to defer the payment of capital gains taxes on the property until they receive cash for an exchange. There is no limit to the number of times this type of transaction may be performed.
26 U.S. Code § 1031 – Exchange of real property held for productive use or investment
No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind which is to be held either for productive use in a trade or business or for investment.
How does a 1031 Exchange work?
A landowner sells a tract of farmland or wooded property. The proceeds from the sale are held by a ‘Qualified Intermediary’. The money from the transaction may never be in the seller’s possession. Within 45 days, a new replacement property must be identified and the transaction must be completed within 180 days of the sale of the original property.
What’s the catch?
Well, there’s not one really. However, there are rules & guidelines that must be followed to qualify:
- 1031 properties must be used for business or investment purposes. ‘Flipped’ homes and/or primary residences do not qualify.
- A Qualified Intermediary, typically an attorney, must hold the proceeds from the sale until the next property is purchased and those funds are used.
- The timeline must be strictly adhered to. The replacement property must be identified within 45 days of sale of the previous property and the acquisition of the replacement property must be completed within 180 days of the former.
- The property value amount of the replacement property must be the same or more than the previous property.
- The value amount of the new property may not exceed 200% of the sold property.
- The title holder must remain the same. This may be a person, business, or entity but it may not change through transactions.
Maintain Wealth & Grow Your Portfolio
Identifying goals is the most important step any investor can take. The most common goals and needs of investors:
- Save money for retirement
- Diversify portfolios to mitigate risk
- Create a legacy for heirs
The second most important step is assembling the right team. A well-rounded team of advisors might include an attorney, a financial advisor, tax accountant, and land broker.
Diversify your portfolio to weather any uncertainty.
The Broker You Choose Matters.
It is important to find a farmland real estate brokerage with experience in assisting with these transactions. Time is of the essence, and these sales require adequate thoughtful planning.
From the sale of real property, the owner/seller has 180 days to acquire a new property. This new property must be identified with 45 days of sale of the former property. With over 40 years of experience, Geswein Farm & Land has an extensive network to communicate with and identify prospective properties, buyers, and sellers.
Information has been gathered from sources deemed reliable but not guaranteed and is subject to change without notice. The information contained herein is provided for informational purposes only and not to be construed as tax or legal advice. Always seek the advice of an attorney for the legal or tax consequences of a transaction and/or related transactions.
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