Mid Atlantic Real Estate Journal — March 14 - 27, 2014 — C
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§ 1031 E xchange
ection 1031 of the Inter- nal Revenue Code per- mits real and personal property that is “held for pro- By Scott R. Saunders and Pamela A. Michaels, Esq., Asset Preservation, Inc. FarmandRanchExchanges “Opportunities AboundWhenSellingRural Real Estate” S
in different property. 5. Mitigation credits for re- storing wetland property may be exchanged for other mitiga- tion credits. A s e l l e r
tax exclusion on the primary residence portion of their prop- erty, while most or all of the remainder of the property can qualify for tax deferral under IRC §1031. IRC §121 allows a property owner to exclude capital gain taxes if the home was their primary residence for two (2) of the last five (5) years. Couples filing a joint tax return can exclude up to $500,000 of the capital gain on the sale of their principal residence while single filers can exclude up to $250,000. PERSONAL PROPERTY AND LIVESTOCK
Section 1031 permits per- sonal property held for invest- ment or used in a business to be exchanged for other similar personal property that is in either the same General As- set Class or the same Product Class. Many farm and ranch sales include significant irriga- tion equipment, farm machin- ery and tractors. The IRS has established 13 General Asset Classes along with a more detailed description of Product Classes, which are specified in the North American Industry Classification System (NA- ICS).
Livestock held for invest- ment may also be exchanged, although livestock held primar- ily for sale would not qualify. Furthermore, IRC §1031 states that livestock of different sexes are not like-kind property. Most tax advisors believe breeding livestock that are not held primarily for sale can be ex- changed. Although a bright line standard regarding ex- changeable livestock does not currently exist, some tax advi- sors are of the opinion that a purebred registered beef cow may be like-kind to a grade beef continued on page 9C
ductive use in a trade or business” or “held for in- vestment” to be exchanged for other “like- kind” proper- ty while de- ferring capital
of a farm or ranch may be able to take advantage of two different tax code sec- tions to mini- mize capital
Scott Saunders
Pamela Michaels
gains and recapture taxes that would otherwise result from the sale of a property. In the context of real property, the definition of “like-kind” is so broad that almost any perpetual interest in real property of any type will be treated as like kind to any other perpetual real property interest. Consequently, one is not limited to an exchange of a ranch for another ranch or a farm for another farm. Instead, a farm can be exchanged for a commercial office property, a residential rental property or even raw land. Finally, a sale of a farm or ranch often consists of selling real and personal property. As discussed below, both may qualify for deferral in a 1031 exchange. REAL PROPERTY Real property held for pro- ductive use in a trade or busi- ness or for investment can be exchanged for any like-kind real property to be held for either investment or for produc- tive use in a trade or business. When dealing with the sale of a farm or ranch, the most obvious form of qualifying real property is the actual acreage. However, land used as a farm or ranch can present additional 1031 exchange opportunities. For example: 1. In states where water rights are considered to be real property, many farmers and ranchers are exchanging their rural water rights to acquire income producing real estate, thereby increasing cash flow and reaping tax benefits from depreciation deductions. 2. Mineral rights may provide another 1031 exchange plan- ning opportunity. 3. Some rural property own- ers are conveying conservation easements¬ on their land to ac- quire more productive property through an exchange. 4. A 1031 exchange has been extremely useful in the grant- ing of an agricultural easement in exchange for fee simple title
gain tax liabilities on the sale of real property. Under IRC §121, for example, farm and ranch sellers can often qualify for a
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