What is a 1031 Tax Exchange?

Top 50 Questions about Farmland

A 1031 Tax-Deferred Exchange, named after IRS Code 1031, allows you to defer capital gains taxes when you sell a property and reinvest the proceeds into a "like-kind" property. This strategy is widely used for farmland sales to maximize reinvestment and minimize tax burdens.

How Does a 1031 Exchange Work?

1. Sell Your Farm: The exchange process begins when your farm sells. The sale date for tax purposes is when the money changes hands at closing.
2. Identify Replacement Property:
3. Close on the Replacement Property:
4. Defer Your Tax Liability: The capital gains taxes are deferred by reinvesting the proceeds into a replacement property of equal or greater value.

What Taxes Are Deferred?

• Federal Capital Gains Tax: Currently 15%, plus an additional 3.8% Net Investment Tax.
• State Tax: In Iowa, around 8%, unless you materially participate in farming operations.
• Total Tax Burden: Deferring taxes can save up to 25% or more of your gain.

Example

• Original Purchase Price: $1,000/acre
• Current Sale Price: $10,000/acre
• Capital Gain: $9,000/acre
• Deferred Tax Savings: 25% of $9,000 = $2,250/acre

Key Takeaways

1. A 1031 exchange lets you reinvest proceeds from a sale into like-kind property while deferring taxes.
2. You have 45 days to identify and 180 days to close on a replacement property.
3. Work with a qualified intermediary and a professional farmland expert to ensure compliance with IRS rules.

Interested in learning more? Contact David Whitaker – Iowa Land Guy for expert guidance or to connect with IPE 1031 Exchange, the industry experts who can make your 1031 process seamless!

David Whitaker | Iowa Land Guy