There are many 1031 exchanges facilitated each year involving agricultural assets. Of course, the land can be exchanged for other land or any real property to be held for investment or use in a trade or business. However, farmers have many other assets that qualify for 1031 tax-deferral. Two of the most commonly exchanged assets are livestock and equipment.
One of our first agricultural exchanges involved a central Pennsylvania farmer who decided to relocate to Wisconsin. When selling your farm, packing up all your belongings and moving 800+miles away, it is usually more cost effective to sell your livestock and farm equipment here rather than paying to transport everything to your new location.
Our client opted to sell his personal property through an auction. Although this was the best way for him to proceed, the process is a little different than just a typical sale. We had to make sure we did everything to comply with the 1031 regs. First, we had to identify our client’s intent to exchange and notify ALL of the buyers that our client’s rights to their assets had been assigned to 1031 CORP., as their qualified intermediary. We worked with our client and the auctioneer and determined to (1) post a notice that the auction was part of a 1031 exchange at the entrance to the auction, (2) provide each person a notice as their arrived for the auction, and (3) advise all buyers to make their checks payable to 1031 CORP.
The definition of like-kind in a real property exchange is very broad and any real property to be used for investment or use in a trade or business will qualify. When exchanging personal property held for investment or use in a trade or business, you must also acquire replacement property of like-kind but the definition of like-kind is tighter. Generally, like-kind is something within the same asset classification code (tractors for tractors or similar equipment, trucks for trucks, etc.) or the same thing (livestock for livestock). When exchanging livestock, the replacement livestock must be of the same sex so no cows for bulls.
A 1031 exchange also provides a great exit strategy for farmers who are ready to sell their farm and retire. They can exchange their land for other income producing real property (NNN property, multi-family, rental properties, etc.) that will provide a steady stream of income during their retirement.
For this farmer, the exchange of livestock and equipment saved him over $30,000 in taxes. This is a huge amount of money when relocating your business and your family and he had the ability to keep that money invested in his business.