Many farmers do not realize the enormous benefit that a 1031 Exchange can afford them. 1031 is the tax code section that allows owners of investment or business assets to exchange (and buy up in value) which will result in a deferral of all taxes. Farmers and Ranchers can exchange land as long as the replacement property is held for investment.
Many farmers do not take advantage of a section of the code in 1031 that allows them to defer the tax on sale of livestock and business assets like tractors. Livestock can be exchanged as long as it is held for investment. The most common types of livestock include breeding stock and milking cows. There are some specific rules regarding livestock. Livestock exchanges must be of the same sex and typically the farmer cannot exchange between breeds (i.e. milking cows are not equal to beef cows).
Farmers can also exchange equipment. Usually this means tractors, machinery or irrigation equipment. For assets to be exchanges for other personal property in a 1031, they must be of the same general asset class or product class. The IRS has identified the asset classes they believe are like kind with detailed description of classes (NAICS).
A recent exchange included a farmer with a stud bull valued at $20,000. The stud was exchanged for two younger bulls valued at $22,000 (for both). The farmer paid $5,000 for the original bull and had 2 useful season breeding with him. The bull was owned in a C Corp and would have had to pay tax of $5,250.00 but with the 1031 no tax was due that year.
Farmers have three useful assets to exchange in a 1031 that can save them thousands of dollars in taxes. If you would like more information on a 1031 exchange, please call Midland Trust at (239) 333-1031.
Please note there are several rules that need to be followed in a 1031 exchange. Please request our 1031 Exchange Guide for more information and consult your tax advisor.