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Because farmers contemplating retirement have often owned their properties for several decades, their adjusted tax basis in their farm property is often quite low. Using a 1031 exchange of like-kind property can indefinitely defer the tax if the investment property is held until death. Like-kind property does not have to be another farm. The IRS like-kind definition includes any real property the seller will use for investment purposes or that is used as trade or business property. Some examples are multifamily housing, a single family home, commercial investment property, a car wash or self-storage business.
Prior to listing the farm with a realtor or selling it to a neighbor, a retiring farmer should identify retirement financial goals, research the investment vehicles to achieve the goals, and carefully plan to follow the IRS Section 1031 rules that achieve capital gain deferral. The forty-five (45) day rule requires the seller to identify the like-kind replacement property within forty-five (45) days of the sale and close on its purchase within one hundred-eighty (180) days of the sale. Prior consideration of retirement income needs and prior identification of preferred investment vehicle or vehicles poise the seller to take advantage of the 1031 tax deferral. The deferred taxes provide additional retirement funds for investment.
If you are considering a future sale of your farmland and your machinery and equipment, please contact me for more information on a 1031 Exchange and on future estate tax implications.