Farm & Ranch Exchange, Part II

The Big Picture

As discussed in a prior newsletter “Farm and Ranch Exchanges, Part 1,” the 1031 exchange offers a powerful tax deferral strategy for those selling farms or ranches. We discussed “split treatment” transactions whereby sellers leverage Section 1031 with Section 121 for the sale of the primary residence on the property. In most of these situations, the landowner pays no tax on the amount of the sales price attributable to the primary residence and defers the gain on the remaining proceeds by performing an exchange.

Today we focus on the expansive possibilities that rural land offers for deferring taxes. In fact, no type of real estate in America provides more options for deferring capital gains taxes than agricultural land.

Why it Matters

Real estate ownership does not consist of merely one single right. Rather, it is often described in law as ownership of a “bundle of sticks”. Normally this refers to the right to use, sell, lease, enter or give away the property. With rural property it could also be said to refer to the many ways that certain rights could be severed from the property and sold. Section 1031 affords the ability to “sell off” those individual rights in a tax-deferred manner.

Severance Options

1. Water Rights. In states where water rights are considered real property, farmers and ranchers often convey some or all of their groundwater rights to buy more land or other qualifying “like-kind” real estate with the sales proceeds through a 1031 exchange.
2. Mineral Rights. When owners of mineral estates choose to exchange those interests for land, brick-and-mortar or other real property to be held for use in a trade or business, they may be able to defer taxes through a 1031 exchange. See “Keeping Uncle Same out of the Oil Patch,” Landman magazine, 2008, by this author at http://www.excel1031exchange.org.
3. Conservation Easements. Certain types of conservation easements qualify as like-kind property for 1031 purposes. A landowner who conveys this type of an interest to a unit of government or a land trust agrees to limit the amount or type of development allowed on the property while retaining ownership of the land.
4. Involuntary Transfers. When real property is the subject of eminent domain or other involuntary transfers, IRC Section 1033 provides yet another form of tax deferral.
5. Renewable Energy. If structured properly, sales of wind farms and turbines, solar easements, carbon credits and other forms of renewable energy that involve conveyances of real property interests may qualify for 1031 treatment.

Takeaway
For sellers of agricultural properties, IRS section 1031 offers tax deferral advantages in many contexts.

About us:

Greg Lehrmann is the founding member of Excel 1031 Exchange with 42 years of experience in commercial and residential real estate. For the past three decades he has dedicated his career to 1031 exchange work and has handled tens of thousands of exchanges throughout the country.

Mr. Lehrmann is a distinguished attorney double board certified in commercial and residential real estate law by the Texas Board of Legal Specialization. Only 2% of attorneys in Texas meet this exacting standard. He has a B.B.A. with honors in accounting from The University of Texas and a J.D. from The University of Texas School of Law.

Mr. Lehrmann facilitates 1031 transactions while educating and advising fellow real estate professionals about the transformative benefits of 1031 exchanges. He has written and spoken extensively about 1031s, and has published numerous articles including:

“§1031 Tax-Deferred Exchanges: Evolving Rules, Greater Opportunities” (July 2002 Tierra Grande)

“Using Advanced §1031 Exchange Strategies to Improve Client Investment Returns”, (Spring 2005 SIOR Professional Report – national publication of Society of Industrial and Office REALTORS®)

“Keeping Uncle Sam Out of The Oil Patch”, (January/February 2008 – Landman national magazine)

“Safe Harbor” (July 2008 Texas Realtor article on vacation-home exchanges.)

Mr. Lehrmann and his wife, Texas Supreme Court Senior Justice Debra Lehrmann, have two sons, Gregory & Jonathan, practicing attorneys, and two beautiful grandchildren, Jack (age 4) and Haley (age 2).