Selling Farm Land - What next?

[BUBear29]

Bogles-

My family is contemplating selling our farm land (about 500 acres in East Texas) which we bought 17 years ago in a fire sale for about $600k. We’ve put in about $1m of imorovements over the years including farm house, warehouse, equipment, gun ranges and road clearing. Property is also heavily treed and can be used for tree farm in certain areas.

We recently had a valuation done and its expected to fetch between $4-5m. We don’t know what we want to do with the funds but in order to avoid taxes (legally) we want to roll them into an(some) income producing properties.

So what do fellow bogles utilize for income producing properties which are relatively low risk? We already have a sizeable vacation home which draws in strong income so looking to diversify beyond that.

[Mike Scott]

Can you just keep the farm and lease it for income? Maybe hire a farm manager and run it as a business? I'm not sure why you would trade one income producing property for another one unless there is a significant payoff to offset the transaction costs.

[over45]

How are you going to avoid taxes with that sizeable gain?

[GibsonL6s]

It may pay to spend some time with an attorney to understand the 1031 laws just to check the "like kind" box. From there, in my opinion the lowest risk class of property would be multi-family. Low risk of course depends on the leverage you use as well.

[wabbott]

How are you going to avoid taxes with that sizeable gain?

https://www.irs.gov/newsroom/like-kind- ... ction-1031

Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free.

[BUBear29]

Can you just keep the farm and lease it for income? Maybe hire a farm manager and run it as a business? I'm not sure why you would trade one income producing property for another one unless there is a significant payoff to offset the transaction costs.

We’ve considered keeping for tree production but it is not necessarily income producing compared to other pursuits (tree farms are long drawn out processes). And maybe I should reuse the word farm to say just land. It is used for hunting and play. We grow some crops to maintain ag exemption but it is certainly not a functioning farm as the word implies.

[alex_686]

How are you going to avoid taxes with that sizeable gain?

https://www.irs.gov/newsroom/like-kind- ... ction-1031

Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free.

I would second Wabbott's post. To extend a bit, it is the classic tax avoidance / optimization method in this situation. The downside is that it is complex. Boggleheads tends to favor DIY investments but doing a 1031 probably is not one. Good advice is expensive. There are many advisers out there, some of quality and some sell snake oil. Expect to do a good chunk of reading up and research before you go down this road.

The other choice is just to do the simple thing and take the tax hit.

[BUBear29]

How are you going to avoid taxes with that sizeable gain?

https://www.irs.gov/newsroom/like-kind- ... ction-1031

Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free.

I would second Wabbott's post. To extend a bit, it is the classic tax avoidance / optimization method in this situation. The downside is that it is complex. Boggleheads tends to favor DIY investments but doing a 1031 probably is not one. Good advice is expensive. There are many advisers out there, some of quality and some sell snake oil. Expect to do a good chunk of reading up and research before you go down this road.

The other choice is just to do the simple thing and take the tax hit.

Thanks to both. We certainly would retain counsel to determine 1031 qualification and requirements due to the $$ amount. My brother is also a real estate attorney and will be advising on the transaction as well.

[alex_686]

Thanks to both. We certainly would retain counsel to determine 1031 qualification and requirements due to the $$ amount. My brother is also a real estate attorney and will be advising on the transaction as well.

That is half of the equation, dotting the i's and crossing the t's. The other half is finding suitable replacement property. Most people find it hard to sell one large property and by a equivalent property in a short time frame. There are investment advisers and 1031 funds out there that will help you swap properties. These are the people I was referring too.

[BUBear29]

Thanks to both. We certainly would retain counsel to determine 1031 qualification and requirements due to the $$ amount. My brother is also a real estate attorney and will be advising on the transaction as well.

That is half of the equation, dotting the i's and crossing the t's. The other half is finding suitable replacement property. Most people find it hard to sell one large property and by a equivalent property in a short time frame. There are investment advisers and 1031 funds out there that will help you swap properties. These are the people I was referring too.

Apologies - I see I see. Need to look into this side of the equation. Didn’t know such a niche existed but I guess there is a need for it. Thanks for the idea on that!

[J295]

1031 is straightforward with a capable tax advisor.

[over45]

In addition to a capable atty, you might enlist the help of someone that does family farm transfers - which may be different than farms established and registered as a business and for profit. IRS is hunting for money...