DES MOINES — With tax reform measures now in place, farmers are still learning what that means for their operations. One thing they know is that estate taxes and 1031 exchanges remain largely unchanged.
Very little has changed in regards to 1031 property exchanges, according to Becky Petersen, an attorney with IP&1031, a West Des Moines business that specializes in facilitating the exchanges.
“Farmland is a great investment,” Petersen told farmers at the recent Land Investment Expo in Des Moines.
The 1031 tax provision is often thought of as allowing a farmer near a metropolitan area to sell expensive land to a developer and then to use the proceeds to buy land that is less expensive and further away from urban centers. That isn’t the only use, but it is the most common one.
The federal tax law passed in December 2017 made few changes in the 1031 exchange program or in the federal estate tax. And while some Republican lawmakers recently introduced legislation that would repeal the estate tax, that legislation appears to have a difficult road to becoming law. There are no major moves to eliminate the 1031 program at present.
Still, Petersen says farmers who may be considering a 1031 exchange should talk to a professional about whether such an exchange would be the best direction for their farm business. For some farmers, she says, bonus depreciation may be a better option.
“The key is to plan,” she says.
The purpose of a 1031 exchange is generally to allow owners of business or investment property to defer payment of capital gains taxes by reinvesting the proceeds from the sale of a currently owned property in a new property. There are limits and guidelines for such an exchange. For example, the new property must be what is defined as “real” property. In many cases, that means land should be exchanged for land, rather than for collectibles or equipment.
There are also very specific rules to how an exchange must be made. For example, there must be a qualified intermediary safe harbor for the money as the exchange is being made. There are timelines to follow and documentation that is required. The new property must be held rather than flipped.
All of this requires advanced planning, and every situation is different, Petersen says.
Still, the 1031 exchange can be valuable for farmers or landowners in the right situation, she says.