1031 Exchange Farmland [Ultimate Guide]
So you’ve finally done it, you have decided to sell the farmland. Do you have a large sum of money heading towards your bank account? Unfortunately, federal capital gains taxes are applicable. Federal capital gains taxes can take up to 20% of the sale price from your farmland. This is depending on your annual salary,
In this article, we will outline the steps necessary to 1031 exchange farmland into mineral rights and royalties completely tax-free.
How to Sell Farmland
Of course, you can 1031 exchange farmland only once the property is sold. There are a few ways to go about this. On one hand, you can try selling your farmland by yourself. On the other hand, you can utilize a specialized broker or real estate agent. This is for them to do all of the work for you (at a price, of course). As there is a considerable amount of work to, we strongly suggest working with a professional.
Determining the Value of Your Farmland
For most people, farmland includes most if not all of an individual’s assets. What to do to determine the final sale price (and sales tax) associated with farmland? The property and everything it contains should go through appraisal. Most commonly, the sales price of farmlands in the United States is largely by:
- The Amount of Land
- # of Buildings and Size (Homes, barns, storage, etc.)
- Equipment (tractors, irrigation systems, bailers, etc.)
- Livestock (cows, horses, etc.)
- Supplies and Inventory (crops, fertilizer, etc.)
Taxes Paid on the Sale of Farmland
All in all, the sale of farmland can bring in a considerable amount of money. With that in mind, it is always going to be taxable in some form or another. Currently, the following taxes are applicable to the sale of farmland in the United States:
- Federal Income Tax
- Recapturing of Depreciation
- State Taxes
- Federal Gains Tax
All in all, the amount of tax imposed on the sale of farmland can range anywhere from between 20% to 50%. This is depending on all of the variable conditions. With that, eliminating any of the taxations is a surefire way to save a bit of money during the sales process.
1031 Exchange Farmland
As we mentioned earlier, using a 1031 exchange is a great way to lower or eliminate capital gains taxes on the sale of farmland. A 1031 farmland exchange is useable when another property that is under purchaseis similar to it. In buying a “like-kind” asset, former farmland owners are not required to pay capital gains tax on the sale of their estate.
1031 Exchange Farmland – Requirements
In order to qualify for a reduction in capital gains tax with a 1031 farmland exchange, the following timeline must be true:
- The same taxpayer sells and purchases both assets.
- New properties must be identified within 45 days of the sale of the farmland.
- The new property must be purchased within 180 of the sale of the farmland.
Of course, to qualify for a full elimination of capital gains tax, the new property must be of equal or greater value (i.e. trading up). Up to three properties can be identified as potential purchases regardless of their value. For more information on the rules and regulations for using a 1031 exchange, feel free to read our detailed page on the 1031 exchange process.
Farmland Like-Kind Properties
In order to 1031 exchange farmland, the same taxpayer must purchase a new property that is similar to the old one. For the sale of farmland, there are many options within the realm of property that can be exchanged for, completely tax-free. Most commonly, farmland sales are exchanged for:
- Better Farms
- A Home or Apartment
- Water and Ditch Rights
- Vacant Land
- Mineral Rights and Royalties
Using an Intermediary to 1031 Exchange Farmland
In order to make sure the process goes as smoothly as possible, using an intermediary to 1031 exchange farmland is the smartest way to go. Utilizing the knowledge and resources of a licensed professional will not only help you save the most on taxes but will make the process easier along the way.
Ranger Land and Minerals has over 100 years of combined industry experience transforming assets into profitable mineral rights and royalties through 1031 exchanges. Our team of professionals is here to help leverage your farmland for the best possible mineral rights and royalties.
Maximizing Return on Investment
Once you sell the farmland, putting the money into something brand new such as mineral rights or royalties can be very intimidating. However, with the right purchase, your farmland very well may transform into a passive stream of income, profitable beyond any back-breaking labor tending to crops or livestock.
Purchasing Active Mineral Rights: With active mineral rights, cash flow is generated each month as mineral royalties are divided among stakeholders every single month. 1031 Exchanging for active mineral rights can lead to an immediate and ongoing income stream.
Purchasing Non-active Mineral Rights: Alternatively, mineral rights in high-production areas can also be profitable even if they are not currently being used by an oil or gas company. Non-active mineral rights can be bought and sold for profit, or retained through an oil and gas lease. Depending on your negotiation, new oil and gas leases can lead to steady income for years on end.
What to 1031 Exchange Farmland For
More than anything, investments into mineral rights and royalties are a great way to reinvest the capital derived from the sale of farmland. Mineral rights entitle landowners to the valuable resources found below the earth’s surface. Mineral royalties are earned when those resources (such as coal, natural gas, or oil) are extracted and sold in the marketplace.
Ultimately, selling your farmland is a tough decision. Once you’ve done it, however, your next step shouldn’t be so tough. 1031 exchanging farmland to purchase mineral rights or royalties is a great way to reinvest your money without having to pay a capital gains tax. With the right purchase, mineral rights can be a very valuable asset in any portfolio.
Could you please tell me if when reporting on tax form the
amount paid for mineral rights. Can I subtract the cost of the
land from the total amount paid to be taxed?