For investors holding properties like apartment buildings or industrial parks, a 1031 exchange is typically a fairly straightforward transaction. However, when you’re dealing with farms, ranchland, and other agricultural properties, things can get a bit more complex.
To qualify for a 1031 exchange, the IRS requires a property to be “held for business or trade operations or investment purposes.” This may include activities such as using the property to raise crops or as grazing land for your cattle. The property could also qualify if it was leased to a tenant, such as a farmer, who paid you rent in exchange for use of the land.
However, it’s important to note that the purchase or sale of agricultural property may also include non-real, personal property (like cattle and crops), residential properties (like ranch homes and farmhouses), and/or water and mineral rights. In this case, a portion of the transaction may not qualify for a 1031 exchange. Here’s a closer look at some of the caveats you need to be aware of.
When buying or selling agricultural property, the land and any improvements that are attached to it are considered real estate assets. This includes structures like houses and barns. If a house on the land is occupied by a tenant, worker, or property caretaker who is not the owner, it’s considered an investment property or property used in a business or trade. As such, it would be included in the 1031 exchange.
However, if the house is occupied by the property owner, then it’s considered a personal residence and does not qualify. In this case, the value of the home would be excluded from the exchange. However, a portion of the gains attributed to the sale of the home may be exempt from tax under subsection 121. In addition, the portion of the property sale that does qualify can still receive favorable tax treatment under the 1031 exchange rules.
There was a time when assets such as livestock and harvested crops could qualify as part of a 1031 exchange. However, following the passing of the Tax Cuts and Jobs Act of 2017, this is no longer the case. Today, these items are considered inventory and are not included.
Unharvested crops and improvements such as irrigation may qualify, but each situation is unique. To confirm tax treatment, consider consulting with your attorney and/or tax advisor.
Easements, ditches, rights-of-way, and mineral rights and royalties may be considered real property. In this case, they may qualify for a 1031 exchange. Water rights may also be included, depending on state regulations.
If you’re thinking about engaging in a 1031 exchange with agricultural property, keep in mind that the rules can be more complex. Be careful not to make assumptions. Instead, plan to work closely with professionals who are well-versed in these types of transactions.
To learn more about 1031 exchanges – with or without agricultural property – reach out to our team. We’re happy to provide you with a no-cost consultation.
Because investor situations and objectives vary this information is not intended to indicate suitability for any individual investor.
This is for informational purposes only, does not constitute as individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance.
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