Is a 1031 exchange right for you?

by Enrico Villamaino

Estate planning is a concern of many farmers across the country. As agricultural landowners prepare for the next stage in their lives, many are taking advantage of 1031 exchanges.

Colin Cosgrove (L) was on hand at the American Farm Bureau Federation convention in Atlanta to inform farmers about ways to preserve their assets for their heirs. Photo by Enrico Villamaino

First introduced in the 1920s, 1031 exchanges are a feature of a tax-deferred swap program in which farmers and ranchers can trade farmland, vacant land and certain agriculture assets with newly acquired “like-kind” pieces of property.

According to Colin Cosgrove, executive vice president and head of sales at Inland Securities Corporation, “A 1031 exchange permits a farmer or rancher to defer, but not avoid, capital gains taxes realized upon the disposition of a property if the landowner meets certain criteria.” In order for the taxpayer to defer taxes, they must identify the new property of equal or higher value within 45 days of the disposition closing date and close on the new “like-kind” property within 180 days of the disposition closing date. In order for the taxpayer to fully forgo capital gains tax, they need to purchase an asset of equal or higher value. If they purchase an asset of lesser value, the taxpayer must pay tax currently on the difference in value.

“One of the main advantages of the 1031 exchange is that when it’s structured as a Delaware statutory trust (DST), the owners are able to ease the future tax burden on their heirs,” Cosgrove said. A DST investment allows for fractional ownership in either a single property or in a portfolio of a number of properties. This ownership can often serve as a replacement property for the farmland sold. This offers the heirs to the property to realize distributions paid from the investment while granting them the choice of what to do with their inherited portion upon liquidation of the investment at some future date.

“It’s not a perfect fit for everyone,” cautioned Cosgrove. “It has to be right for you. This is a good plan for someone who is okay with passive ownership. If you really want to have a more active hand in the property you own, this probably isn’t the right fit for you.” Cosgrove encouraged any farmer who wished to find out more to contact his firm to explore their options, along with their own financial advisor.

Founded in Oak Brook, IL, 54 years ago, Inland Securities has grown to be the seventh largest real estate company in the nation. Cosgrove estimated that agricultural professionals now comprise nearly 15% of the firm’s new clientele each year.