Many farmland owners have held their land for decades. In many cases, the farm is fully paid off and producing steady rental income. However, when the time comes to sell, capital gains taxes can significantly impact the financial outcome of a sale.
For some landowners, heirs may inherit farmland but feel uncertain about long-term ownership or management. Others may want to step away from land ownership while still maintaining exposure to farmland investments.
One strategy occasionally discussed in farmland investment circles is the 721 exchange.
A recent discussion highlighted by American Farmland Owner explored how this strategy may work for farmland owners looking to transition out of direct ownership while deferring taxes.
What Is a 721 Exchange?
A 721 exchange, named after Section 721 of the Internal Revenue Code, allows a property owner to contribute real estate into a partnership in exchange for ownership units in that partnership.
Unlike a traditional land sale, this type of transaction does not immediately trigger capital gains taxes, because the land is contributed as an asset rather than sold outright.
Instead of receiving cash from the sale of the farmland, the owner receives ownership units in a partnership or farmland investment fund.
This structure allows the landowner to convert a physical asset—farmland—into investment units tied to a larger portfolio of farmland assets.
How a 721 Exchange Works for Farmland
In a typical 721 exchange scenario, the farmland owner contributes their property into a farmland investment partnership.
The value of the farm determines how many partnership units the landowner receives.
Once the transaction is complete:
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The farmland becomes part of the partnership’s farmland portfolio
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The landowner receives units representing ownership in the fund
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Rental income generated by the farms may be distributed to the unit holders
Instead of owning one specific farm, the landowner now holds ownership shares in a diversified farmland portfolio.
721 Exchange vs 1031 Exchange for Farmland
Many farmland owners are familiar with the 1031 exchange, which allows sellers to defer capital gains taxes by reinvesting into another like-kind property.
However, the two strategies work differently.
1031 Exchange
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Requires selling the farmland
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Must reinvest into another real estate asset
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Typically results in ownership of another single property
721 Exchange
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Transfers farmland into a partnership
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Converts the land into ownership units
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Provides exposure to multiple farmland assets
For some landowners, the 721 structure can provide greater diversification than a traditional 1031 exchange.
Diversification Through Farmland Investment Funds
A key difference between direct farmland ownership and a 721 exchange is diversification.
Owning a single farm means the investment is tied to:
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One location
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One tenant
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One local farmland market
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One crop region
When farmland is exchanged into a partnership structure, the owner’s investment may be spread across multiple farms in different regions.
Rental income from these farms can then be distributed to the partnership’s investors.
This approach allows a former farmland owner to remain invested in agriculture while reducing exposure to a single property or location.
Estate and Succession Planning Benefits
Farmland succession planning can be challenging, especially when multiple heirs are involved.
Dividing a farm among family members often leads to difficult decisions:
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Should the land be sold?
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Should it be rented?
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Should it stay in the family?
Converting farmland into partnership units can simplify the process.
Instead of dividing physical acres, families can divide ownership percentages through units.
This can make it easier to allocate assets among heirs without forcing the sale or physical division of the farm.
Is a 721 Exchange Right for Every Farmland Owner?
A 721 exchange may be worth exploring for landowners who:
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Have significant capital gains exposure
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Want to exit direct farmland ownership
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Prefer diversified farmland investments
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Need flexibility in estate planning
However, these structures can be complex and require careful legal and tax planning.
Landowners considering a 721 exchange should work with qualified tax professionals, attorneys, and farmland advisors to fully understand the implications.
Understanding Your Options as a Farmland Owner
Every farmland ownership situation is unique. Some landowners may prefer to sell outright, while others explore options like 1031 exchanges, family succession planning, or long-term ownership strategies.
Understanding the potential strategies available can help farmland owners make informed decisions about their land.
If you own farmland and are thinking about selling, transitioning ownership, or simply want insight into today’s farmland market, it can be helpful to speak with an experienced land professional.
Talk With a Farmland Specialist
Whitaker Marketing Group works with farmland owners across the Midwest to help them understand land values, farmland markets, and selling strategies.
If you have questions about selling farmland or the farmland market, feel free to reach out.
David Whitaker — 515-460-8585
https://www.wmgauction.com
Even if you’re simply exploring options, we’re always happy to visit with farmland owners.
