Selling Ag Land With Multiple Parcels: Basis of Property

Farms and ranches are often aggregated, piece by piece, over generations.  When doing a 1031 exchange, this offers a simple strategy for taking some cash out in a tax-advantaged way. 

When agricultural properties are aggregated over time, they generally are composed of multiple separately deeded parcels purchased at different prices.  Thus, the various parcels may have significantly different cost basis figures as land prices have increased through the years. 

If you want to take some cash out of your ranch sale and reduce capital gain taxes, it is wise to sell for cash those parcels with the highest tax basis, as they will have the lowest associated tax due.  Conversely, those parcels with the lowest tax basis -- and thus the highest capital gain and potential tax -- are the best parcels to 1031 exchange. 

To help avoid potential problems with the IRS, you should have separate purchase and sale agreements for the parcels that will be exchanged and for the parcels that will be sold for cash.  Accordingly, make sure your ranch broker understands up-front what you are trying to accomplish, and do not spring this on a potential buyer after a contract is in place – they may not agree to restructuring the contract. 

We've provided the information above for general educational purposes only.  It is not intended as specific tax or legal advice.  Please consult your tax advisor for specific advice regarding your particular situation.