Defer your tax from selling a farm or ranch

If you have your own farm or ranch and planning to sell it in the market, you need to be aware of the various taxes and financial planning issues that can help you benefit from such a sale. It is recommended that you engage in the planning process prior to affecting the sale so that you can address such issues properly. Among the several options, the 1031 Exchange is considered to be a suitable option for residential farm or ranch owners.

Rules for identification of a property

While selling a farm/ranch the property to be received should be identified within 45 days from the date of sale of the relinquished property. The rules for identifying the property are quite simple.

i) The Three Property Rule

The owner gets the option to identify up to three properties of any value for replacement under the 1031 Exchange Rule.

ii) The 95% Rule

Any number of replacement properties can be identified if the fair market value of the property received at the end of the exchange period is not less than 95% of the aggregate fair market values of all the potential replacement properties that have been identified.

iii) The 200% Rule

Any number of exchange properties can be identified provided the fair market value of the replacement properties should not exceed the aggregate fair market values of all the properties combined together as on the initial transfer date.

What does not qualify for a 1031 Exchange?

There is wide applicability of the 1031 Exchange with most investors trying to benefit from the tax-deferred opportunity. However, there are certain circumstances under which the Section is not applicable.

q Property held primarily for sale or Stock-in-trade

The following should be excluded from the purview of IRC Section 1031 –

• Any stock that is held in the ordinary course of business or trade to be sold to customers resulting in profit should be taxed as ordinary income.
• Property held primarily for the purpose of sale. This indicates those properties that are outside the ordinary course of trade, business or profession.

q Bonds, stocks or notes

Although dealing with certain stocks fall under the purview of IRC Section 1036 and 1037 these do not qualify under IRC Section 1031 tax-deferred exchange.

q Other securities evidencing interest or indebtedness

The scope of this category is yet to be defined as most court cases falling under this category has become obsolete after the amendment of 1984.

q Certificate of Trust or beneficial interest

These represent right to an interest in the Corporation or stock and do not qualify as real property

q Interest in partnership

This category was included in the Internal Revenue Code in the 1984 amendment. Although a Partnership Firm or an LLC can conduct an exchange at the entity level individual partner interest or LLC member interest is not considered under the IRC Section 1031.

q Chose in Action

This is considered a right to receive or recover money or other consideration in the property but is not considered as a property itself. Therefore, it has been excluded from the benefit provided under the 1031 Exchange.

Whatever option you choose for selling a farm/ranch it is always recommended to seek the help of professional experts who have experience of dealing with such matter.