Farmers often have complex needs when it comes to managing their land and property, particularly when it comes to buying or selling farm-related assets. Paul Neiffer gets those frequent reminders as he travels the country speaking to farmers, agricultural associations, and farm certified public accountants.
Neiffer is a farmer, CPA, and traveling speaker who writes a column on Substack called “Farm CPA Report.”
RELATED: Paul Neiffer wrote about how farmers in certain states will get additional time to file their federal income taxes if they were affected by weather disasters. Read that story here.
Neiffer tells farmland owners and investors about the benefits of 1031 exchanges. He believes that it could be a valuable tax strategy that allows individuals to defer paying capital gains taxes when selling property and reinvesting the proceeds into a similar kind of property.
Neiffer said, “If you’ve got an apartment complex, that's easy. If you’ve got a house that's easy.”
However, for farmers, especially those with unique farm-related structures like hog barns or grain bins, the nuances of the 1031 exchange can be tricky.
Below is a recent post on LinkedIn about the successful use of a 1038 exchange with farmland.
For farmers, understanding what qualifies as Section 1245 property is critical in determining whether a property can be exchanged under the 1031 exchange rules.
“It's tiling, it's a grain bin, it's fences, it's land improvements, it's a hog barn, it's a dairy parlor, it's a controlled atmosphere storage, or it's storage, or it's anything that is not a building,” Neiffer summarized.
RELATED: Beneficial Ownership Information (BOI) has been a confusing topic for farmland owners. The Biden and Trump administrations have had different priorities and timelines about when owners need to submit the necessary paperwork.
While many might assume that all farm-related property can easily be exchanged in a 1031 transaction, Neiffer highlights that some confusion arises around certain types of property, especially when they involve land improvements that are not technically "buildings."
For example, a hog barn might be worth $1.5 million. But if it is fully depreciated, it is important to understand the implications of selling that asset and using the proceeds to acquire bare land, which does not have similar improvements.
Neiffer said that he has seen confusion from farmers utilizing a 1031 exchange when they attempt to trade in Section 1245 property for another piece of land that lacks similar improvements. Neiffer explains that while it is possible to exchange a hog barn (or other 1245 property) for another property, it is important that the new property also contains qualifying Section 1245 property to avoid triggering a taxable event.
He laid out a scenario that could be troublesome. “You say, ‘hey, that quarter section from the neighbors for sale. I want to sell my hog barn for a million-five, and I'm going to roll that million-five into that quarter section tax free.’ Well, it's not tax free, because that quarter section doesn't have any tiling, doesn't have any grain bins. It's just bare dirt. And when it's bare dirt, you got a million five gain. And you got no cash. And so, yeah, you just got to be careful.”
Kiplinger reported that the new presidential administration will likely remain a supporter of 1031 exchanges.
“Trump, a former real estate developer, has long supported the 1031 exchange provision, even while it was under threat of elimination from the Tax Cuts and Jobs Act (TCJA),” the Kiplinger report stated.
“When the TCJA took effect in January 2018, 1031 exchanges were left largely untouched, but the act eliminated personal property exchanges. Trump’s administration is expected to maintain existing 1031 rules without significant changes.”
