Agriculture Exchanges

By: Juno Kenny

All real property within the United States is considered eligible for a 1031 Exchange, including land used for agriculture purposes. However, there are some unique aspects of agriculture exchanges that should be considered to ensure the maximum benefit of any tax deferral received.

What is Eligible for an Agriculture Exchange?

One of the most common issues in an agriculture exchange is determining which assets/interests can be included in the exchange. If the investor does not live on the property, then typically all land, and any improvements made to the land can be included in the exchange. Additionally, depending on the state law, crops and timber that have not been harvested and that are still attached to the land may be categorized as real property as well. Some additional interest types that may be exchanged include oil & gas mineral interests, water rights, leasehold interests and conservation easements. The IRS typically looks to state law to determine what is considered real property, so it is important to work closely with a tax advisor to ensure all eligible interests are included in the 1031 exchange.

Mixed-Use/Partial Exchange

A partial or mixed-use exchange is more common when it comes to agriculture properties since many landowners live on the property that they are exchanging. In these cases, the portion of the property that is used for business can be exchanged, while the portion of the property used as a residence is excluded from the 1031 Exchange. As a side note, the Section 121 exclusion or “primary residence exclusion” may allow exchangers to exclude up to $250,000 single/$500,000 married in capital gain on their primary residence when selling the property as part of a mixed-use exchange.

Special Considerations for Agriculture Exchanges

Identifying Replacement Property

Finding a suitable replacement property in an agriculture exchange may be more difficult for the exchanger if they are looking for agricultural land. Additional factors such as soil quality, water availability, and geographical location must be considered when looking to purchase land used for agriculture. Because of this, it is a good idea to begin looking for a replacement property well before the relinquished property is sold and the 45-day and 180-day exchange timelines begin.

Planting/Harvesting Crops

One of the most unique aspects of an agriculture exchange is the ability to include crops that are still attached to the ground as part of the exchange. Consider a farmer in California selling property that includes $5,000,000 in unharvested crops as part of the sale. Structuring the sale to include those crops as opposed to selling them outright could save the exchanger up to $1,615,000 (32.3%) and allow them to reinvest those funds in a suitable replacement property. Similarly, when purchasing agricultural land as a replacement property, harvested crops that are included in the purchase are considered personal property and cannot be paid for with exchange proceeds.

Conclusion

While agriculture exchanges may seem more complicated than a standard exchange on paper, the fact of the matter is that agriculture exchanges can be accomplished easily with advanced planning and the right team. Strategic planning with your tax advisor and our team of experts at Genesis Bank Exchange can help maximize the potential of your investments.

If you’re interested in starting an exchange or learning more about the 1031 exchange process and how it may benefit you, connect with the Genesis Bank Exchange team by calling 800.797.1031, or explore further details on our website:

https://www.mygenesisbank.com/1031Exchange.

The materials and content provided on this email/website are for general informational purposes only. These materials and content do not, and are not intended to, constitute legal, tax, or financial advice.