Explaining: Like-Kind Exchanges (IRC Section 1031)

Consumers are familiar with a simple question when making a transaction: cash or credit? For farmers and ranchers operating their business, there are different options on the table. One option, called like-kind exchanges, serves as a valuable tool for running an efficient, productive agricultural business.

IRC Section 1031 allows farmers and ranchers to defer taxes when they sell assets and purchase replacement property of a like-kind, whether that be land and buildings, equipment, or breeding and production livestock. Since 1921, these types of exchanges have played a critical role in helping family farmers and ranchers fend off encroachment from commercial and residential entities. However, as demand for agricultural real estate continues to increase, acquiring real estate to fulfill like-kind exchanges is becoming more difficult. IRC section 1031 g (1) could be improved by eliminating restrictive, draconian rules and allowing farm and ranch families more time to complete these transactions more efficiently.

The Bottom Line:

NCBA supports reforms to the current IRC section 1031 that would align generally with the following:

“A taxpayer selling farm, ranch, or other agricultural production property shall have 180 days (rather than the current 45 day limit) to identify a maximum of six replacement properties (rather than the current num-ber of three) regardless of value to be received in exchange as “like kind” after the date on which the taxpayer transfers the relinquished property in the exchange, and such property is received not more than 365 days (rather than the current 180 day limit) after the date on which the taxpayer transfers the property relinquished in the exchange, regardless of the taxable year in which the transfer of the relinquished property occurs.”

Example 1, Generational integration:

Rancher Bob wants to buy more land to integrate his Son Tim into the operation. Utilization of a 1031 exchange can preserve extra capital for land purchases by decreasing tax liability. Rancher Bob sells, through a qualified intermediary, Tract A to his Son Tim for $320,000.

 

Tract A

  • 80 acres cropland, plus house, barn, and machine shed.
  • Originally purchased in 1979 for $100,000.
  • Fair Market Value (FMV) is $320,000.

Rancher Bob purchases Tract B, using a qualified intermediary.

 

Tract B

  • 160 acres pasture.
  • FMV is $320,000.

Rancher Bob’s basis in Tract B is now $100,000, transferred from Tract A.

 

Example 2, Urban Sprawl:

Farmer John owns Tract A near a city where it is becoming difficult and dangerous to maneuver equipment through suburban streets.

 

Tract A

  • 100 acres farmland.
  • FMV of $2 million.
  • Purchased in 1980 for $100,000.

Developer Dan owns Tract B outside the city sphere and would prefer to own land more readily available to build homes.

Tract B

  • 500 acres of farmland.
  • FMV $2 million.
  • Purchased in 1980 for $500,000.

Developer Dan and Farmer John use a 1031 like-kind exchange to trade properties, with each not realizing any gain and trading basis on the properties.

  • Tract A is now owned by Developer Dan with a basis of $500,000.
  • Tract B is now owned by Farmer John with a basis of $100,000.
  • Farmer John continues to farm and the Developer Dan has a ready-to-build development location.
  • Developer Dan has more money to invest in his development.
  • Farmer John continues to grow his operation and generate additional income, rather than Farmer John simply cashing out and exiting the industry.
  • For more information, please contact the
    National Cattlemen’s Beef Association.

    Ed Frank at 202-879-9125
    Max Moncaster at 202-879-9124

    1275 Pennsylvania Avenue NW
    Suite 801
    Washington, DC. 20004