Land Values, Tax Deferral, Wealth Retention and Income

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D Rawles
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Land Values, Tax Deferral, Wealth Retention and Income

Post by D Rawles » Fri May 22, 2015 8:52 am

With interest rates so low - and land values relatively high - and the record number of people turning 65 every day... why isn't there more discussion on the best ways of avoiding taxes on appreciated assets such as farmland - and getting better return on capital? I'm concerned that there is not enough good information available to people who would like to know that taxes on appreciated land/real estate values can be deferred - and that they may be missing better income opportunities while they're alive. Am I wrong? If so, why are so many land sales made to settle estates?

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grabiner
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Re: Land Values, Tax Deferral, Wealth Retention and Income

Post by grabiner » Fri May 22, 2015 9:50 pm

Farmland and real estate are not proper alternatives to investing at "interest rates" (CDs and bonds). They do have tax advantages, but they are also risky investments. Retirees who need income should not be putting more money into risky investments (including stocks).
D Rawles wrote:If so, why are so many land sales made to settle estates?
When an estate is settled, there is little or no capital gain; the heirs inherit the land with a basis of its value on the owner's death. This makes selling the land easier if the heirs do not want to keep the land as an investment.
Wiki David Grabiner

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JoMoney
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Re: Land Values, Tax Deferral, Wealth Retention and Income

Post by JoMoney » Sat May 23, 2015 2:00 am

You can defer taxes on just about any asset until you decide to sell it. Land itself doesn't earn any income unless you rent it out, farm it, etc... and the income from that is taxable. People have varying opinions, but I'm not aware of any research suggesting being a landlord or farming offers "better return on capital" then owning some other business, or that they offer an income stream that's somehow safer.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

ourbrooks
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Re: Land Values, Tax Deferral, Wealth Retention and Income

Post by ourbrooks » Sat May 23, 2015 5:01 pm

Deferring taxes isn't even an issue unless you've actually made a profit on the land. Farmland is valuable only to the extent that farmers are able to profitably grow crops on it. Food prices have been falling over a long period of time so farmers need to be more productive to make a profit. How much they can increase their productivity is what will determine whether farmland prices rise.

Over 1980 until the present, it is true that farmland prices have increased faster than the rate of inflation but not as fast as common stocks or, even, residential real estate (at least, up until the 1980 crash). In some parts of the country, farmland has lost value over the time period. As grabiner points out, farm land is a risky investment and the reward is not necessarily worth the risk.

The reason why so many land sales are made to settle estates probably has nothing to do with investments or tax deferrals but simply with the fact that many people were able to live on their land or in their houses until shortly before they died. They wanted to stay in their homes more than they wanted better income opportunities.

D Rawles
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Re: Land Values, Tax Deferral, Wealth Retention and Income

Post by D Rawles » Sat May 23, 2015 5:58 pm

Some good comments. Only thing is they mostly assume a farmland investment is being considered against alternatives. What about those who already own it? Over 90 percent of cropland production comes from family-owned farms. In some cases they've owned the land for decades. Having a low cost basis with a significant capital gains exposure is not unusual. You're right. Farming is risky and returns are only in the 3 percent area. My question brings up the matter of utilizing tax-deferred exchange property which is higher quality/lower risk and provides 60 to 100 percent more income. Why should someone expose their hard earned value to higher risk... for lower income return, waiting to die for the heirs to benefit from a step up in basis? It makes little sense when you think about it.

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Slick8503
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Re: Land Values, Tax Deferral, Wealth Retention and Income

Post by Slick8503 » Sat May 23, 2015 7:00 pm

Because farmers enjoying owning and farming their own land. Most that I know would much rather continue to own and farm their ground, rather than own the same dollar amounts in the stock market, even if the anticipated returns are higher. In other words, there is much more to it than dollars and cents.

D Rawles
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Re: Land Values, Tax Deferral, Wealth Retention and Income

Post by D Rawles » Sat May 23, 2015 8:01 pm

More to it... Understand. Sentimental value; farming heritage. Yet, the farmland is their livelihood. And, what they yield from the value of it could be more. By the way, it isn't about taking stock market risk. You can't defer taxes on appreciated property but reinvesting sale proceeds into securities. It's about capturing appreciated value, deferring taxes and receiving a better and more stable income from higher quality real estate. In the case of farmland, there are plenty of retiring farmer situations where the children have become professionals or gone into their own businesses. They don't want farming risks. They knew how it was growing up most of the time... one tough business. They are the heirs nonetheless. And, they are concerned about preserving the wealth the parents worked hard to acquire.

ourbrooks
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Re: Land Values, Tax Deferral, Wealth Retention and Income

Post by ourbrooks » Sat May 23, 2015 9:36 pm

I'm still confused about the situation being described. I can think of several common cases:

1. The parents die and the children don't want to farm. The children get a stepped up basis and don't pay taxes.

2. The parents want to stay on the land. They may rent it out instead of farming it, but they'd like to stay where they are. They're not selling, so there's no issue of taxes.

3. The parents don't want to farm anymore and they don't want to stay on the land and they don't want to rent it out. In this case, a tax deferred exchange is not a possibility. Exchanges have to be "like for like" so they have to be land for land. If they don't want to farm or do some other business based on the land, they can't do the exchange. In particular, the IRS documentation says that you can't exchange land for vacation rentals.

4. The parents do want to farm but they'd like property in a different geographical location, say, nearer their kids, or they'd like to change from a dairy herd to raising ginseng. Under those conditions, a tax deferred exchange would be an option, provided they could find someone who wanted the land that they now have.

Here's the IRS documentation on Section 1031 exchanges. http://www.irs.gov/uac/Like-Kind-Exchan ... ction-1031
Sounds to me like you have to be very, very careful in doing this kind of exchange.

D Rawles
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Re: Land Values, Tax Deferral, Wealth Retention and Income

Post by D Rawles » Sun May 24, 2015 8:05 am

Ourbrooks, Under Section 1031, a farmland owner is not limited to exchange for farmland. That simply is not the case. Exchanging investment property for investment property; selling higher-risk, lower-income farmland in exchange for higher quality commercial real estate which provides higher, more stable income is allowed. Here's another example; a long-time owner of undeveloped property which produces no income can sell it, do a 1031 exchange into high quality commercial property which provides income - and defer capital gains as well as other taxes depending upon the state of residence. Your comments are welcome, because they illustrate the reason this topic deserves more discussion.

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