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As you know, qualified properties for 1031 Exchanges (both relinquished properties and replacement properties) are those which are "held for investment or productive use in a trade or business". Farms and ranches normally
are qualified properties for 1031 Exchange, along with other kinds of vacant
land such as timberlands. In other
words, vacant land is generally a qualified property for 1031 Exchange because
it is either held for investment or, in the case of a farm or ranch, held for
productive use as a business.
Of course, if you sell an
apartment building, office building, shopping center, industrial-warehouse,
motel, nursing home, ACLF, factory, store, etc., you can probably reinvest in a
farm or ranch as replacement property in a 1031 Exchange. However, more often we find people who are
selling vacant land (including farms and ranches) to developers, etc. so that
the replacement side of the exchange is the issue.
By the way, many times sellers of
farms and ranches are able to carve out a portion of the property as there
homestead (if they in fact live on the farm or ranch) thereby qualifying for
the Section 121 exemption. The Section
121 Exemption has nothing to do with 1031 Exchange. It is simply another tax relief section of the Internal Revenue Code like 1031, but this section allows a married couple who can satisfy the "two out of the last five years" test to exempt from taxation the first $500,000 of capital gain on their homestead (their main home), $250,000 for a single person. This exemption is,
in fact, better than 1031 because it is an actual tax forgiveness rather than
the deferral of payment of tax which 1031 accomplishes.
Anyway, back to replacement
property for sales of farms and ranches.
Many potential sellers of such property put off the sale even if they
are reaching the age where they should be enjoying retirement because they do
not want to pay capital gains tax which can be huge where the property has been
in the family for years and developers, etc. are offering huge per acre
purchase prices. They feel they must die
with the property to get a stepped up basis and avoid tax. We have heard them say to potential buyers "talk to my kids after I die". So, they
continue working the farm or ranch (many times after their age suggests that
they should not) earning a meager income based on the value of the land to
developers (we have seen situations where such owners are getting less than a
2% return on the value of their property).
Of course, such farm and ranch
owners could do a 1031 Exchange and reinvest in traditional property, usually
in the area where they live. There is
nothing wrong with this if such replacement properties fit the lifestyle such
folks desire. On the other hand, many don't want active management property (or more vacant land investments) especially if they are older.
For such people, passive investments such as TIC's may be the answer.
With a 1031 Exchange, farmers, ranchers and other vacant property owners may be able to reinvest into a diversified portfolio of TIC's and earn a return on the cash invested which often far exceeds the return on value of the property that the farm or ranch generated.
They can then enjoy their retirement with the knowledge that monthly income will be steady and, if they die owning the TIC’s, then their heirs will receive the TIC's and, when cashed out on resale of the properties by the sponsors, their heirs will receive the cash and avoid all that capital gains tax that would have been payable if there were no stepped up basis. Triple net properties may also be a part of such a replacement property portfolio but such properties generally require a larger cash investment in a single property than TIC's.
1031Replace.Com may be able to provide the solution for farmers, ranchers and other vacant property owners who would like to sell in this seller's market, pay no capital gains tax and take life a little easier. |
