Ethan Branscum: 721 Exchanges Could Keep Farms in the Family

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The farmland may be paid off and generating income. But looming capital gains taxes can make a straight sale financially painful. Or maybe an heir isn’t so sure that owning a farm is really what he wants to do in the years ahead.

That is where a 721 exchange could be an option.

“We're one of the few firms that have ever done it or tried it in the farmland space,” said Ethan Branscum, Director of Investments at Sower Farmland, who grew up on an Arkansas farm and now farms again with his wife.

Ethan Branscum bio:

• Sower Farmland – Partner & Director of Investments

• Boston Mountain Rural Health Center – Board Member

• AgHeritage Farm Credit Services – Former Vice President of Agribusiness & Capital Markets

• PGIM Real Estate – Former Senior Investment Associate

• Arkansas Farm Bureau – Former Assistant Director

How a 721 Exchange Works

A 721 exchange, named after Section 721 of the Internal Revenue Code, allows a property owner to contribute real estate into a partnership in exchange for ownership units in that partnership. Unlike a sale, the transaction does not immediately trigger capital gains taxes.

Branscum described it this way:

“If a landowner who has some reason they don't want to sell, typically that would be a capital gains situation. If they're looking to exit the asset or want to get out or do something different, but they have a capital gains burden…usually they can either sell the land and do a 1031 exchange. They're just going to go into more land that defers the taxes.”

“But with a 721 exchange,” he continued, “they can just exchange the ground straight into a partnership. Our fund is set up as a partnership that can allow the exchanges of land into it via 721 exchange.”

In simple terms, instead of selling farmland and buying another farm, the landowner contributes the property into a farmland investment fund structured as a partnership. In return, they receive units in that fund.

RELATED: Dave Brown, President of IPE 1031, told American Farmland Owner in 2024 how limiting a $500,000 cap could be for 1031 exchanges.  

721 Exchanges Can Bring Diversification

One of the most significant differences between a 1031 and a 721 exchange is diversification. Under a 1031 exchange, a landowner must reinvest in other like-kind real estate — typically another single property. That keeps the owner concentrated in one asset. A 721 exchange into a farmland partnership changes that.

“Once the land is exchanged into the fund, then it becomes unitized,” Branscum explained. “You own it in whatever the current share price of the fund is. You take the total value of the farm divided by the share price of the fund, and you get that many units.”

Branscum likened the structure to a familiar investment vehicle.

“It's a mutual fund,” Branscum explained. “It's a mutual fund of farms, is essentially what it becomes.”

Instead of being invested in one farm in Iowa, the former landowner now owns a slice of adiversified farmland portfolio.

“Now you're not just invested in a single farm in Iowa,” Branscum said. “You're now invested in farms in Georgia, Louisiana, Mississippi, Indiana, Michigan. And as the farms collect rent, that rental income is paid out to the unit holders of the fund. So, you're still receiving income from your asset.”

The landowner remains tied to agriculture and rental income, but it has geographic and tenant diversification layered in.

Succession Planning Advantages of 721 Exchanges

Beyond tax deferral and diversification, Branscum said the 721 structure offers flexibility in estate and succession planning.

Farmland can be notoriously difficult to divide among heirs. When siblings inherit property together, disagreements can arise over whether to sell, rent, or operate the land.

“There are some situations where it's useful to kind of get land divided up into units, as opposed to just a big, bulky asset that's hard to divide up,” Branscum said.

“Typically, that comes with succession planning, or when they're trying to figure out how to divide this asset up among their kids, or grandkids,” Branscum said. “Or maybe children that have inherited land that they now own with multiple other siblings or heirs, and nobody can decide…should we sell, should we not sell, well, I don't want to sell.”

By converting farmland into partnership units, families can more easily allocate proportional ownership shares without physically splitting the farm or forcing a sale. Units can be distributed among heirs in specific percentages, potentially reducing conflict.