What is a 1031 Tax Exchange?

Top 50 Questions about Farmland

Hey, it's the Iowa Land guy, and here's the top 50 questions that I get asked about farmland. What is a 1031 tax-deferred exchange? So where did the number 10 31 come from? It's Irs code 1031. There's also 1033 and some other numbers that you'll need to know, but the big one is 10 31. Now, this is not a tax avoidance tool.

It's tax-deferred deferred exchange, so like kind property exchange. You're gonna sell one farm and you're gonna buy a replacement farm. There's lots of rules that go into a 1031 exchange. Some big rules or numbers you need to know is 45 days. Okay? 45 days. From what? From when you sold. The old farm. Okay.

When you sell your farm and now you want to reinvest, you have 45 days. And when is the sale day? Let me back up just a second. The sale day is not, when we say sold at the auction, the sale day for tax purposes for a 10 31 is when the money changes hands when you close on that farm. From that point, you have 45 days forward to recognize a new farm.

What does recognize mean? Recognize means I have, uh, identified a couple of farms. There's some identification rules. We'll look in deeper, but I've identified new farms that would make a good replacement property. We've checked it with our qualified intermediary. They know that, yep, this is a good, uh, this is a good farm to identify for replacement.

Now you have 180 days to close on that new farm from when the relinquish property was sold. So 180 day window to recognize the farm. Execute the contract and take the money that you made from selling your one farm and put it in to buying your next farm. That's a 10 31 tax-deferred exchange. What did you defer though?

Here's what you deferred. Let's pretend you bought a farm at a thousand dollars an acre and now it's worth $10,000 an acre. There's a $9,000 gap there in the middle. That's your gain. $9,000 per acre, you're gonna pay. 20, uh, about 25%. It varies person to person. I'm not a tax accountant, but here's what you need to know.

15% federally is the current rule for, uh, IRS code. So you're gonna pay 15% on any of that gain. Now a lot of people forget about net investment tax. That's 3.8% more that helps to go, uh, pay for the Affordable Care Act. Okay, so now we're at 18.3%, but then you also have your state of Iowa tax. State of Iowa tax ranges around that 8% range.

But there are some rules, um, that you can avoid the state of Iowa tax if you materially participate in the farm operation. So the whole thing that you need to know about 10 31 is can I avoid taxes for a short period of time? So let's reword that. Can I defer taxes for a short period of time? If I sell a piece of property and buy a like-kind piece of property?

Yes, you can. There's a lot of rules to it and you have to be thinking about it before you start the process of selling your farm. So we'd love to talk with you more about it. Um, we work with, uh, I p e 10 31 Exchange. Um, they are the experts in the industry. We can hook you up. We have the right people to do it.

We do 'em every day.

David Whitaker | Iowa Land Guy