Selling a Farm or Ranch FAQ
What are capital gain tax rates on the sale of farm or ranch land?
Presently (2018), federal long-term (i.e., property held for more than one year) capital gain tax rates are:
- 0% for gains up to $38,600
- 15% for gains between $38,600 - $425,800
- 20% for gains exceeding $425,800
Married Filing Jointly
- 0% for gains up to $77,200
- 15% for gains between $77,200 - $479,000
- 20% for gains exceeding $479,000
Head of Household
- 0% for gains up to $51,700
- 15% for gains between $51,700 - $452,400
- 20% for gains exceeding $452,400
Married Filing Separately
- 0% for gains up to $38,600
- 15% for gains between $38,600 - $239,500
- 20% for gains exceeding $239,500
The state in which the land is sold may also assess a capital gains tax, which will vary by state. There is also a “net investment income tax” of 3.8% that may be assessed, depending upon modified adjusted gross income thresholds and filing status ($250,000 for married filing jointly and $200,000 for single).
How can I defer capital gain taxes on the sale of agricultural land?
If you intend to reinvest your land sale proceeds into other real estate, you can use a Section 1031 exchange to defer your capital gains tax. As long as you continue to hold the replacement property, or continue to use the 1031 to exchange into other property, you can continue to defer the tax indefinitely. Once the land (or subsequent replacement property) is sold – not exchanged – in a taxable sale, the deferred tax will be due. However, under current tax law (2018), it’s possible to eliminate the taxes altogether by exchanging and holding the property until death. At this point, your heirs will receive a “step up” in basis from the property’s tax basis to its fair market value in the estate. This step up in basis is tax-free. Conceivably, your heirs could then sell the property for fair market value soon after your death and pay little or no tax.
Should I start planning my 1031 exchange before I sell my farm or ranch?
Absolutely. Before you close on your farm or ranch sale, you should discuss your exchange with your tax advisor and have a qualified intermediary in place to facilitate your exchange. Once your ranch sale closes, the 45-day property identification period goes by fast -- so you want to be proactive in identifying potential replacement properties. Bottom line: it’s critical to understand the 1031 exchange rules, requirements and timelines, as a disqualified exchange can result in you owing tax on your farm or ranch sale.
Can I 1031 exchange livestock or machinery with my farm or ranch sale?
No. Effective January 1, 2018, with the implementation of the Tax Cuts and Jobs Act, personal property such as livestock and machinery does not qualify for Section 1031 exchange treatment. Only real property (i.e., real estate) is now eligible for exchange.
My ranch sale includes our home – does this qualify for a 1031 exchange?
No, your home is considered personal property and does not qualify for tax deferral treatment. However, subject to certain limitations, your home may qualify for the primary residence exclusion under Code Section 121.
For further information about selling a home with a farm or ranch, please refer to our Straight Talk guide, "Selling a Home Along with a Farm or Ranch: Using the Section 121 Exclusion."
We’re selling the family farm that is held in a partnership, and some of the partners would like to go their separate way after the sale. Can we still qualify for a 1031 exchange?
Partnership interests do not qualify for 1031 treatment; therefore, the individual partners are not able to do their own 1031 exchange. This is a complex area that requires proactive planning.
For further information about partnership and LLC entity planning for 1031 exchanges, please refer to our Straight Talk guide, "Entity Planning When Selling a Farm or Ranch: Partnerships, LLC's and the 1031 Exchange."
Can ranches that are held in corporations qualify for the 1031 exchange?
Yes, corporations can perform exchanges, and like partnerships and LLCs, these situations can get complicated depending on the goals of the shareholders.
For further information on corporate ownership of real estate, please refer to our Straight Talk guide, "Entity Planning When Selling a Farm or Ranch: Corporations and the 1031 Exchange."
1031 Exchange FAQ
What is a Section 1031 exchange?
Generally, when you sell investment or business real property you have to pay income tax on the gain. Section 1031 of the Internal Revenue Code allows you to defer the tax as long as you reinvest the sales proceeds into like-kind property as part of a qualifying 1031 exchange.
To learn more about the 1031 exchange and its many benefits, please refer to our Straight Talk guide, "Using a Section 1031 Exchange When Selling a Farm or Ranch."
What is a like kind exchange?
Like kind exchange and tax deferred exchange are simply other names for a Section 1031 exchange.
How does a Section 1031 exchange work?
- Before deciding whether to complete a 1031 exchange, we advise that you discuss your transaction and situation with your tax advisor.
- Prior to closing on your property sale, contact a qualified intermediary to facilitate your 1031 exchange. The intermediary will prepare all of the applicable documents necessary for the sale of the relinquished property.
- Close on the sale of the relinquished property. At this point, the closing agent should transfer the net exchange proceeds from the sale directly to the qualified intermediary, who will hold the funds in a separate account.
- 45-day identification period: Your 45-day ID period begins with the closing of the relinquished property sale. You must identify your replacement property(s) in writing by midnight of the 45th day.
- 180-day exchange period: Once you close on the sale of your relinquished property, you must close on your replacement property purchase within 180 days, or the date your tax return is due, whichever is earlier.
- Close on the sale of your replacement property(s). Your qualified intermediary will wire transfer the necessary exchange proceeds to the closing agent and complete the necessary paperwork to finalize your exchange.
- This is an abbreviated explanation, and there are strict rules that apply. Please refer to our Straight Talk guide, "Using a Section 1031 Exchange When Selling a Farm or Ranch."
What is a delayed exchange?
This is the most common type of 1031 exchange, and is also called a deferred exchange. It allows you to sell a property and then acquire one or more replacement properties at a later date, using the help of a qualified intermediary.
What is a reverse exchange?
Just like it sounds, a reverse exchange allows you to first acquire a replacement property and later dispose of your relinquished property.
What is a partial exchange?
A partial exchange occurs when you “trade down” and your replacement property is of lesser value than your relinquished property. This may result in taxable "boot" (see below).
What is 1031 exchange boot?
Boot is the money (cash boot), debt relief (mortgage boot) or fair market value of any non-like kind property received by you in your 1031 exchange. Any boot received from the exchange is taxable to the extent of gain realized on the exchange. For a completely tax-free exchange, there must be no boot.
How is my property’s cost basis affected by a 1031 exchange?
In an exchange, your cost basis in the relinquished property carries over to the replacement property. Consequently, there is no “step up” in basis for depreciation purposes, and future depreciation deductions will be based on the carryover basis. However, if you contribute additional cash or take on additional debt to exchange into a more expensive replacement property, your cost basis will be increased by that amount.
Can corporations or partnerships perform 1031 exchanges?
Yes, 1031 exchanges can be completed by individuals, corporations, partnerships (general and limited), limited liability companies and trusts.
What is a qualified intermediary?
A Qualified Intermediary, or QI, is an independent party who facilitates a 1031 exchange. When performing an exchange, the exchanger cannot have actual or constructive receipt of the proceeds from your relinquished property sale – otherwise, the exchange is blown and the exchanger will owe tax. Instead, the exchanger must contract with an independent party to facilitate the exchange.
How long must I own my replacement property before I sell it?
There is no magic timeframe because the tax code states no specific holding period. Qualifying for tax-deferral treatment under Section 1031 is based on the taxpayer’s intent, which must be to hold the replacement property for “productive use in a trade or business, or for investment.” If it is deemed to be held for resale, that could disqualify it for exchange purposes. Generally, to be safe, it is wise to hold the replacement property for a minimum of two years before selling or converting it to personal use.
1031 Exchange Requirments FAQ
What is the 1031 exchange timeline?
- 45-Day Identification Rule: You must identify, in writing, your replacement property(s) within 45 days from the date of closing on your relinquished property sale.
- 180-Day Rule: The purchase of your replacement property must be closed and the exchange completed no later than 180 days after the closing of the relinquished property sale, or the due date (with extensions) of your income tax return, whichever is earlier.
How many properties can I identify for my Section 1031 exchange?
You may identify multiple potential replacement properties, as long as you meet one of the following rules:
- Three Property Rule: Any three properties regardless of value.
- 200% Rule: Any number of properties as long as the aggregate fair market value of the replacement properties does not exceed 200% of the value of the relinquished property.
- 95% Rule: Any number of properties if the fair market value of the properties actually received by the end of the exchange period is at least 95% of the aggregate fair market value of all the potential replacement properties identified.
What is like kind property?
Like kind properties have the same nature or character, even if they differ in grade or quality. Basically, most real estate is considered like kind to other real estate. For example, you can trade farm land for a commercial land and building. The Code allows for ample flexibility when it comes to exchanging different types of real estate.
What types of property qualify for a 1031 exchange?
Since the implementation of the Tax Cuts and Jobs Act on January 1, 2018, only real estate is eligible for a 1031 exchange and, to qualify for tax deferral treatment, it must be held for productive use in a trade or business, or for investment purposes.
That said, “real estate” does not mean just land or buildings. Other real estate interests that qualify for 1031 treatment include leasehold interests (of 30 years or more), certain easements (conservation, right of way), water rights, ditch rights, mineral rights, oil and gas interests, fractional interests and more.
Can I use a 1031 exchange on my house?
No, a primary residence does not qualify for 1031 treatment. However, the sale of your home may qualify for the primary residence exclusion under Section 121 of the Code, which may allow you to exclude capital gain on your home sale.
Can I take title to my replacement property in a different name?
Generally no. You must take title to the replacement property in the same name in which the relinquished property was held. An exception to this rule applies to certain disregarded entities, such as a single-member LLC or certain trusts.
What types of property do not qualify for a Section 1031 exchange?
Non-qualifying property includes stocks, bonds, notes, partnership interests, property held primarily for resale, such as inventories, raw materials and real estate held by dealers, and certificates of trust. In short, anything other than real property (i.e., real estate) held for productive use in a trade or business or for investment.
What are the 1031 exchange rules to avoid paying any capital gains tax on my property sale?
In order to defer 100% of the capital gains tax on your sale, you must not receive any “boot” from your exchange. For your exchange to be 100% tax deferred, follow these guidelines:
- The value of and the equity in your replacement property must be equal to or greater than the value of and the equity in the relinquished property.
- The debt on the replacement property must be equal to or greater than the debt on the relinquished property. If debt on the replacement property is less, gain recognition will occur, unless additional cash is contributed to offset the debt reduction.
- All of the net proceeds from the sale of the relinquished property must be used to acquire the replacement property. If cash proceeds are received from the exchange transaction, this will also result in recognition of gain.
A good rule of thumb to defer 100% of your capital gains tax is you must “stay even or trade up in debt and equity.”
Does personal property qualify for a 1031 exchange?
No. Effective January 1, 2018, with the implementation of the Tax Cuts and Jobs Act, tangible personal property — such as vehicles, livestock, machinery, etc. — does not qualify for 1031 exchange treatment. Under current tax law, only real property (i.e., real estate) is eligible for exchange.
Investment Property FAQ
What are NNN properties?
NNN, also called triple-net, properties are governed by leases holding the tenant responsible for all property management duties and operating and capital improvement costs. They are designed to be a passive property investment for the landlord.
For further information about NNN Properties, please refer to our Straight Talk guide, "Transitioning From Ag Land to Commercial NNN Leases."
What are some common types of NNN properties?
Examples of NNN properties commonly for sale include restaurants (McDonald’s, Panera Bread, Chick-fil-A), drugstores (Walgreens, CVS), banks, dollar stores (Family Dollar), convenience stores (Circle K, 7-Eleven), gas stations, automotive parts stores (AutoZone, O’Reilly), medical urgent care clinics and more.
What is a commercial ground lease?
A ground lease is a type of NNN lease that encompasses the land only. The landlord leases the land to a tenant, who then constructs its own building on the property. The tenant owns the building and pays monthly rent to the landowner to lease the land. At the end of the lease term, or earlier if the tenant terminates the lease prematurely, ownership of the building conveys to the landlord at no cost.
For further information about commercial ground leases, please refer to our Straight Talk guide, "Triple-Net (NNN) Ground Leases."
What are the benefits of owning a ground lease property?
A high-quality ground lease property may provide you with:
- Passive ownership with no management responsibilities
- Long-term lease that may provide stable income for decades
- Rent increases throughout the lease term
- Committed tenant, since they’ve invested in the location by building on it
- Security in the form of the building value, which conveys to you at no cost at the end of the lease term, or earlier if the tenant defaults on the lease
What are the benefits of owning NNN properties?
High-quality NNN properties may provide you with:
- Long-term, stable income
- Dependable, financially stable tenants
- Rent increases throughout the lease term
- Passive ownership with no management responsibilities
- Strong locations
- Potential appreciation in value
What are the risks of owning NNN properties?
The value of a NNN investment property is based largely upon the income stream it provides to the landlord – the net operating income. Thus, the biggest risk is vacancy risk – without a tenant, your building is likely worth significantly less. You must consider what would happen if the current tenant moves out – you would lose that income until you found a replacement tenant, at which point the new tenant is likely to require modifications to the building at your cost. Additionally, you must consider what rental rate a new tenant would be likely to pay, and how long would it take to get the new tenant in place. Another risk is market risk – how real estate values overall impact the value of your building. Another key risk is that of building re-use – this is particularly important with special-use buildings, such as a gas station that would likely have to be leased to another service station operator or would require very substantial remodeling – or razing – to make it suitable for a different type of tenant.
What is net operating income from a property?
Net operating income, or NOI, is simply gross rental income minus operating expenses. It does not include items such as depreciation, debt service or income taxes.
What is a cap rate?
A cap rate, short for capitalization rate, is a measure of investment return based on the net operating income and the price of a property. It is calculated as NOI/Purchase Price = Cap Rate. For example, a $1 million property that provides NOI of $70,000 a year has a 7% cap rate.
What is a GSA property?
The GSA, or General Services Administration, negotiates and administers leases on behalf of various federal government agencies, including the Social Security Administration, FBI, BLM, Department of Agriculture and others. GSA properties simply refer to buildings that are leased by these government agencies.
For further information about GSA Properties, please refer to our Straight Talk guide, "Federal Government Leases: Pros and Cons."