Living out in the country is a breath of fresh air for most people. For others, hanging up the cowboy hat and heading to the city or the coast may be the ultimate choice in order to enjoy life to the fullest. For farmers and ranchers alike, selling the property is a big step, no matter what the next step might be.
If you decide to sell your ranch, then you may be eligible for a 1031 exchange, so long as the sale does not include your primary residence. For ranchers with multiple properties, 1031 exchanges help taxpayers retain as much of their capital as possible when it comes time to sell, by “trading up” for a new personal property.
In this article, we will outline the entire 1031 exchange process, beginning with the sale of a ranch. With this, we will present mineral rights as one of the most important things to consider when identifying new properties to purchase within the exchange.
How to Sell A Ranch
First things first, let’s sell your ranch. For those that are not aware, ranches are large plots of land for raising cattle and other livestock, typically found in western North America. While a farm is used to grow agricultural crops, ranches are primarily used for producing meat, dairy, and other animal products. In some cases, ranches and farms are simultaneous if the property is dedicated to multiple disciplines. Today, ranches also offer many services beyond their exports including horseback riding, accommodation, event hosting, and more.
Ranches can be sold on the open market, just like any other personal property. While many ranchers start with a simple sign in their front yard, there are also a number of different marketing methods that can be used to locate a buyer. Today, ranches are typically sold in online auctions with the help of a broker or industry-specific real estate agent.
Determining the Value of Ranches
Even if you are planning to use an agent in the sale of your property, it is generally a good idea to have an approximate estimate of your ranch’s value. A ranch is essentially just a sum of its parts, which add up together to make the property’s total value. In order to begin to get an idea of your ranch’s value, it’s good to make a list of its features including:
- Land condition
- Number of existing structures and condition
- Whether or not livestock is part of the package
- Included water or mineral rights
- Zoning elements
- And more
In truth, the actual value of a ranch is only going to be as much as a buyer is willing to pay. In booming areas of the United States, land for continued ranching or otherwise repurposing can be extremely valuable when considering the potential development onsite.
Ranches can be sold with or without present livestock, which can add a significant amount of value to the sale in question. Before putting a price on your ranch, it is always a good idea to check local listings of similar properties in order to gather information on current market conditions.
Taxes Paid on Selling Ranches
In most parts of the United States, ranches of all shapes and sizes sell for hundreds of thousands of dollars, and often even more. Not only are ranches used as homes, second homes, and country getaways, but they can also be used to start a business and begin earning revenue. If your ranch is not your primary home, the sale of it generally warrants:
- Federal Income Taxes
- Capital Gains Taxes
- Sales Taxes
- Local Taxes
- And More
Unfortunately, ranch sales are subject to considerable taxation, at rates up to over 40% of the sale price. While most of this is unavoidable, capital gains taxes can be deferred by taxpayers who choose to purchase a new property in a 1031 exchange.
Selling Ranches with a 1031 Exchange
Under the IRS code for a 1031 exchange, the rules are laid out simply so that investors can avoid capital gains taxes otherwise associated with the liquidation of their assets. When purchasing a new property of equivalent or greater value, investors can “trade” their ranch for a new asset, and avoid paying capital gains taxes entirely. In a similar vein, new assets of a lesser total value can be purchased to avoid a partial amount of the capital gains tax.
Ranches Like-Kind Properties
In order for a 1031 exchange to truly be complete, taxpayers must acquire a like-kind asset after the sale of a ranch. Ranches are one of the highest valued kinds of personal property on the market today, so exchanging for a new, more expensive asset may actually be a bit difficult. However, if you don’t need the cash immediately, the following properties can be considered as “like-kind” for ranches:
- Farms and farmland
- Apartment buildings
- Vacation rentals
- Shops and malls
- Mineral rights and royalties
- And more
Ranches 1031 Exchange Timeline
1031 exchanges have a purchasing period of 180 days. This means that as soon as your ranch is sold, you have approximately 6 months to replace it with a new asset and follow the proper paperwork with the IRS. While this may seem like a long period of time, it is important to note that taxpayers are required to identify at least one new, potential property within 45 days of the sale.
Why Purchase Mineral Rights and Royalties?
In the United States, investors can buy and sell mineral rights, regardless of the surface rights of a property. In this split estate model, mineral rights owners are able to enter into oil and gas lease agreements with companies interested in extracting and selling any natural resources found on the property. With this, monthly oil and gas royalty checks are paid to mineral rights owners if the operation goes as planned.
In conclusion, ranches can be sold for a large amount of money, more of which can be retained with a 1031 exchange. When considering a 1031 exchange, many busy investors find that working with a specialized 1031 exchange intermediary can save time and maximize the potential of a further investment of the capital.