Estate Planning for the Agribusiness: Like-Kind Exchanges

Farmers have had to deal with a wide variety of economic issues over the last 40 years.  In the early 1980s, the prime rate hit 21% and many farmers were forced into bankruptcy.  In the 1990s, the housing bubble expanded and farmers often looked to sell their land to real estate developers for a significant premium over agricultural prices as part of their retirement strategy.  In the 2000s, commodity prices rose and real estate farm values increased dramatically.  When the housing bubble burst in 2008, farmland did not fall and continued to rise, matching the increase in crop prices.  Today, crop values have fallen causing the value of farmland to soften once again.

So, what if a farmer wants to transition out of farming?  What options are available?  Are some choices better than others?  This article will take a brief look at one clever estate planning option for farmers looking to sell their farmland, a Like-Kind Exchange.

Farmers that intend to retire and purchase real estate in Florida, Arizona or elsewhere, can take advantage of section 1031 of the Internal Revenue Code (“section 1031”), often referred to as a Like-Kind Exchange.  A Like-Kind Exchange is a tax deferred exchange that allows for the sale of real estate and the acquisition of other real estate without generating a capital gains tax liability from the sale of the property.

A Like-Kind Exchange does not accurately describe the flexibility open to real estate owners.  Any real estate owner, not just farmers, may reinvest land sale proceeds in a beach condo unit, apartment complex or even a golf course without recognizing capital gains taxes if they strictly follow the section 1031 tax provisions.  If the owner keeps the new real estate until his or her death, the basis is stepped up through inclusion in their trust or estate, eliminating the deferring capital gains for their children.

The technical requirements required to make a Like-Kind Exchange are beyond the scope of this article.  A great deal of thought is required prior to selling land and purchasing replacement property within the required time periods.  If you own land that you wish to sell, and are considering the purchase of replacement real estate, contact us about Like-Kind Exchanges.