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Tax Implications of Selling Top Breeding Bull

After reading Jeanne Marie Laskas great article “Breeding
the Perfect Bull
” published in the Smithsonian Magazine, I wondered whether
a 1031 tax deferred exchange would make
sense when selling prize Red and Black Angus, Simmental, Charolais, Hereford,
and Senegus bulls. The article is about “Donnell Brown and his fellow cowboys
combining modern science with their decades of experience with cattle ranching
to create the perfect specimen named Revelation.” Why would a rancher sell a
top breeding bull like Revelation? Some of the reasons include genetics, age,
injury and the price offered. Ranchers can take advantage of 1031 tax deferred
exchanges when selling their animals and purchasing cattle of equal or greater

The R.A. Brown Ranch:
Creating top Breeding Bulls

The R.A. Brown Ranch located near the small town of
Throckmorton, in East Texas is not your average cattle ranch. Like 97 percent
of U.S. cattle ranches, it is also family-owned and operated, passed down to a
fifth-generation rancher in a $76 billion beef production industry comprised of
about 750,000 independent “cow-calf operations” with fewer than 50 heads. The
Brown ranch operates a 2,000 head farm specializing in breeding. Such ranches
are known as “seed-stock providers” representing the beginning of the beef
production cycle where genetics determine the qualities of filet mignon,
sirloin and steak burgers.

Selling Top Breeding
Bulls: Tax Implications

A top breeding bull can sell for $100,000 once their
offspring are proven to be prime calves.  

What would be the tax implications of the sale? It depends
upon the purchase price, the sales price, the depreciation taken and the state
capital gains rate. For example, a bull calf purchased for $10,000 and held for
five years, depreciation taken for each of the five years resulting in a net
adjusted basis of 0. A sales price ranging from $25,000 to $100,000 and selling
expenses of $3,000, the estimated tax due is:

State   Tax                           Estimated Tax
                       $25,000   $50,000   $75,000   $100,000
AL     5.00          5,400     10,400     15,400       20,400
CA    9.55           6,401     12,539     18,676      24,814
IA   8.98          6,276     12,271     18,266       24,261
MT    6.90          5,818     11,293     16,768       22,243
NE    6.84          5,805     11,265      16,725      22,149
WY   0.00          4,300      8,050       11,800      15,550

Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming do not impose a state capital gains tax.

Livestock: 1031 Exchange Benefits and

If there is intent to replace the bull with like-kind
personal property, another bull or multiple bulls, then the taxes due can be
deferred in an Internal Revenue Code Section 1031 tax deferred exchange. The
IRS like-kind exchange rules require livestock
to be:

Same sex

Mixed cattle for steer calves

Cows for mixed yearlings

Half-blood heifers for three-quarter-blood

Steps to 1031

Before selling or buying in a reverse exchange, talk with
your accountant to confirm the estimated capital gains tax. Once you decide to
move forward in an exchange, contact a Qualified Intermediary (QI) to ask
questions about the exchange and its mechanics. It is important to discuss
where the exchange proceeds be held, if interest will be earned on the account,
and what security measures will be in place such as the use of a qualified escrow
account and personal identification number to protect the account.

Once the QI is engaged, let them know the contact
information of the sale or purchase, perhaps the auctioneer. The QI will
prepare exchange documents for the first leg. Exchange funds will be wired to
the escrow account under the taxpayer’s tax identification number.

By the 45th calendar day, the replacement
property will need to be identified by providing information on the bull(s).
The value of the replacement property must be equal to or greater than the net
sales price; otherwise a tax is triggered on the difference.

Contact the QI to let them know the details of when you are
closing on the replacement bulls. The QI will prepare exchange documents for
the second leg wiring the exchange proceeds to the closing.

Learn more about livestock
by visiting a special educational section on the Atlas 1031
website. Learn about how 1031 exchanges benefit farmers and ranchers by
downloading an Atlas eBook created for the Agriculture industry.

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 over 500 exchanges representing $436,752,637 in exchanged value and
deferral of over $21,610,902 in taxes. You can reach him at 800.227.1031 and


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