Selling land? Here are 3 issues to consider
In a number of areas throughout the US, farmland is in high demand. Though the majority of interest is from farmers, investors are looking to farmland to diversify their holdings. Standard & Poor's 500-benchmark index's annual return was 11.8% between 1950-2008 while the return on farmland with capital appreciation and current yield was 11.6%. Given higher commodity prices, high farm incomes and a reported 30% reduced supply of available farmland for sale from historical numbers; the outcome is driving farmland prices up. As a result, landowners are selling and considering using profits to acquire more farmland or other cash generating real property.
3 Issues to Consider When Selling Farmland
Over the years, Atlas 1031 has accommodated 1031 exchanges for many families and partnerships owning farmland. There are those who elect to purchase more farmland and others who wish to sell and reinvest into a vacation property held for investment with minimal personal use. Arriving at the decision to sell can be and is often a difficult task. Securing the guidance of your CPA and estate attorney is important to achieving your family and financial goals. Issues to consider when selling include:
- How can farmland be sold and provide a cash flow for the retiring farmer?
- If the goal is to sell and purchase additional land, how can taxes be minimized and new land purchased?
- What are the tax implications of passing on the farmland to your beneficiaries?
A 1031 exchange is a tax deferment tool that allows the landowner to sell and replace with any real property given the Internal Revenue exchange rules are followed. The tax obligation does not go away, it is deferred until the replacement property is sold. Those taxable dollars rather than being paid are used towards the acquisition of the replacement property interest free. Farmland can be sold and exchanged for an investment property that generates cash flow, such as triple net lease, single tenant property such as a Tire Warehouse or CVS Pharmacy.
Rather than selling, farmland can be passed on to the beneficiaries and estate taxes paid. The beneficiaries could elect then to sell at a stepped up basis without capital gains taxes. If sold later, they should consider the tax implications deciding whether to initiate a 1031 exchange or sell and pay federal capital and possible state capital gains taxes.
Finally, there is merit to paying the federal and capital gains taxes given they are at historical lows rather than the likelihood of paying higher taxes in the future. Your choice, but if your intent is to minimize capital gains taxes, a 1031 exchange is an alternative that uses those taxable dollars towards purchasing replacement property that generates cash flow for tomorrow's needs. Discuss with your estate attorney and CPA.
Once the decision to sell is made and you want to learn more about a 1031 exchange, call us for a free consultation.
Andy Gustafson, Certified Exchange Specialist®, serves as a managing member of Atlas 1031 Exchange, LLC, a nationwide accommodator of Internal Revenue Code Section 1031. To date, he has accommodated 497 exchanges representing $432,718,000 in exchanged value and deferral of over $21,578,283 in taxes. You can reach him at 850 -496 -0090 and firstname.lastname@example.org.