Get Cash in 2011, Pay Tax in 2013
With the rapid increase in farm land prices over the last year or so, many farmers are now considering selling some farm land to lock in these high prices. The Tax Code allows a farmer to reinvest the proceeds from this sale into other real estate using a tax-deferred exchange under Section 1031 (commonly known as a 1031 exchange).
Generally, the farmer has 45 days after the closing of the sale to identify the property they want to buy (usually 3 can be identified without any risk) and then another 135 days to actually purchase the property, or 180 days in total.
As we approach the beginning of July, farmers have another option using a 1031 exchange that is not available for sales before that date. This option allows the farmer to receive cash from the sale (actually it must be held by a third party accommodator), but not report the gain until 2012 and pay the tax in 2013.
Here’s how it works. For any sale that happens after approximately July 5 has 180 days to identify and close on the purchase of the new property. This 180 day period ends in January of 2012.If the farmer is unable to actually purchase replacement property during this time period, the installment sale rules determine when the gain is reported. Under these rules, as long as the farmer had properly identified the replacement property and has been unable to purchase this property AND the cash is not received by the farmer until 2012, the gain is taxable in 2012 and the tax is due on April 15, 2013 (or March 1, 2013 under the applicable estimated tax rules).
This is a method to allow farmers to actually lock in the price, get the cash into an interest bearing account and defer the tax for an additional tax year. This can be complicated and involve a qualified accommodator to handle this type of transaction. But deferring the tax on a $1 million-plus gain for another year may be worth the extra work involved.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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