Is a 1031 Exchange Best Tax Move for New Ranch Real Estate?
Powerful provision in the United States tax code defer capital gains taxes. What does the exchange process and the Section 1031 code offer for buyers in the ranch real estate market? 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.
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 benefits. Depending on your state, the across-the-board taxes could gorge on your profits. Four different taxes add up.
- 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
Commentary by Asset Preservation Inc. suggests ways to minimize taxes. The website at apiexchange.com offers a wealth of useful resources. These tutor 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 taxpayer while studying options. Options include leveraging equity, diversifying, consolidating, cash flow, management relief, increased depreciation, and estate planning.
Effects of 2018 New Tax Laws
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.
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.