Top 50 Questions about Farmland
A 1031 Tax-Deferred Exchange, named after IRS Code 1031, allows you to defer capital gains taxes when you sell a property and reinvest the proceeds into a “like-kind” property. This strategy is widely used for farmland sales to maximize reinvestment and minimize tax burdens.
How Does a 1031 Exchange Work?
1. Sell Your Farm: The exchange process begins when your farm sells. For tax purposes, the sale date is when the money changes hands at closing.
2. Identify Replacement Property: Within 45 days of the closing date, you must identify potential replacement properties in writing, following IRS guidelines.
3. Close on the Replacement Property: Within 180 days of the closing date, you must complete the purchase of the identified replacement property.
4. Defer Your Tax Liability: Capital gains taxes are deferred by reinvesting the full proceeds into a replacement property of equal or greater value.
What Taxes Are Deferred?
- Federal Capital Gains Tax: Currently 15%, plus an additional 3.8% Net Investment Tax.
- State Tax: In Iowa, around 8%, unless you materially participate in farming operations.
- Total Tax Burden: Deferring taxes can save up to 25% or more of your gain.
Example
- Original Purchase Price: $1,000/acre
- Current Sale Price: $10,000/acre
- Capital Gain: $9,000/acre
- Deferred Tax Savings: 25% of $9,000 = $2,250/acre
Key Takeaways
- A 1031 exchange lets you reinvest proceeds from a sale into like-kind property while deferring taxes.
- You have 45 days to identify and 180 days to close on a replacement property.
- Work with a qualified intermediary and a professional farmland expert to ensure compliance with IRS rules.
Interested in learning more? Contact David Whitaker – Iowa Land Guy for expert guidance or to connect with IPE 1031 Exchange, the industry experts who can make your 1031 process seamless!
David Whitaker | Iowa Land Guy
