Is a 1031 Exchange Best Tax Move for New Ranch Real Estate?
A powerful provision in the United States tax code defers capital gains taxes. This tax code enables people to save money on capital gains and re-invest their hard-earned dollars. The 1031 exchange in ranching essentially allows for commercial, or income-producing properties to forgo capital gains. Here’s how it works.
What Does the 1031 Exchange in Ranching Do?
When a ranch is used as a commercial hunting property, fly fishing property, rentals, and/or recreational ranch, then it may fall under the definition of like-kind.
Like kind refers to a purchase and sale of one like property for another. So if you’re selling a working ranch or business property and using the sales money to pick up commercial ranching property, your transaction could fall under a like-kind transaction. This varies from state to state in terms of how this is interpreted, so check with your both your accountant and local land broker.
The tax code states: “No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged for property of like-kind which is to be held either for productive use in a trade or business or for investment.”
Usual Taxes Levied on Sold Properties
Be conscious about selling a property without investigating the 1031 exchange for ranching. Depending on your state, the across-the-board taxes could gorge on your profits. Four different taxes add up quickly. Take a look.
- Depreciation is recaptured at 25 percent, and then some.
- Federal capital gains taxes may be 15 percent to 20 percent for high earners.
- NIIT or net investment income is taxed at 3.8 percent, according to Section 1411 of the tax code.
- State taxes range from zero in some states to over 13 percent and others.
Options When Offloading Ranch Real Estate
So what are your options for selling your ranch? Does a 1031 exchange work for ranch sellers?
Should taxpayers who are trying to decide whether to hold their ranches, sell them, or exchange them using the 1031 tax code? That is, holding a property until the real estate market adds value – if it is probable for the area’s growth to resume. Or selling a property and paying all the taxes. Or employing the 1031 exchange or a partially deferred exchange to gain greater benefit.
A good action plan will consider the goals and motives of the taxpayer while studying options. Talk to your accountant about taking a deep dive into your potential tax benefits and losses with a ranch sale.
Options include leveraging equity, diversifying, consolidating, cash flow, management relief, increased depreciation, and estate planning.
Effects of 2018 Tax Laws in Today’s Market
Effective January 1, 2018, The Tax Cuts and Jobs Act affects ranch real estate investors who own all types of properties. The 1031 exchanges of real property can be continued, although other personal property cannot be exchanged, i.e. aircraft, heavy equipment, etc. Capital gain tax rates remain the same. “Carried interest” compensations and requirements will be different.
New tax advantages apply to farmers and ranchers, however. For five years, these taxpayers may write off the cost of new investments in personal property immediately. Other changes include new interest limits, depreciation schedules, loss deductions, pass-through benefits, and more. Be sure to consult with your financial professional.
When it comes to 1031 exchange in ranching, the issue is quite complicated. However, with the right team of professionals, examine all of your options. Then make the financial decision that’s best for you.
Contact Premier Ranch Real Estate Agents
Harrigan Land Company at (800) 524-1818 specializes in large ranch and recreational properties in Colorado, Wyoming, New Mexico, and Utah. We have extensive experience dealing with 1031 exchanges and conservation easements with large ranches.