Thursday, March 15, 2007

Will 1031 Exchanges be Revised?

The 1031 Exchange issue is always a hot topic in Agriculture circles. Basically it works like this: if you sell a piece of property you have to pay capitol gains tax on the "profit" unless you reinvest these funds into a like investment within 60 days. What this has done is drive up farmland prices all across the countryside. You have willing sellers who get a huge offer on land, usually on the urban fringe and then they have a short window to reinvest and many times will buy what ever is available in a distant county and are willing to pay a premium price to get it.

If you are a farmland seller this is usually something you like and want to keep the 1031 option. If you are a farmland buyer, then you are having to pay a premium for farmland and have increased pressures in making it cash flow.

One of the Bush administrations proposals is to not allow land that has been involved in a 1031 exchange to participate in the commodity program. Speculation is however that if land owners can't participate in the program, they will simply raise cash rents and squeeze the operating margins of the farmer.

What's difficult is when the commodity prices are at current levels, some opinions are that cash rents should go up anyway since the market can absorb more.

Where does this leave the 1031 debate - stay tuned and we will see.

2 comments:

Rob Egenolf said...

You have your 1031 exchange requirements a bit confused.

You must engaging the services of a Qualified Intermediary to receive the proceeds and notify your buyer that it will be an exchange BEFORE completing the sale of your property.

Then you have 45 days from closing to identify your replacement property and 180 days from closing to complete the acquisition of your replacement property.

Be sure to engage a Qualified Intermediary that gives you 100% of the interest earned on your funds as well as one that provides good security for your funds while they are being held.

Rob Egenolf
Santa Barbara CA
egenolf@gmail.com

American Farmer said...

Rob,

Thanks for the clarification.