The Tax-Advantaged 1031 Exchange

Section 1031 of the Internal Revenue Code allows landowners to sell farmland, raw land, or other agricultural assets while deferring capital gains taxes on any appreciation. This tax-deferral strategy has become increasingly popular, as it provides landowners with the opportunity to reinvest original sale proceeds into like-kind real estate, potentially boosting income, appreciation, and portfolio diversification.

Like-kind property isn’t limited to agricultural land; it includes any real estate held for business or investment purposes. This flexibility allows landowners to exchange into a wide range of property types, opening the door for a diversified investment portfolio and potentially increase future income. Examples of like-kind properties include:   

Important Note: It is important to know that when considering the sale of your agricultural land; equipment, livestock, and crops are not exchangeable under IRC  Section 1031, although water rights and mineral rights may be exchangeable under certain conditions.

1031 Timeline Requirements

To execute a successful 1031 exchange transaction, there are specific guidelines that must be followed. You will need to identify a replacement property within 45 days of the sale of your relinquished property, with the entire 1031 exchange timeline being no longer than 180 days from the sale of your relinquished property.

Three Basic Steps to Follow

While there are several requirements governing a 1031 exchange, most transactions follow a simple, three step process:

1. You sell your property, known as the relinquished property, and the proceeds are escrowed with a Qualified Intermediary (QI).

2. Your QI, through a written agreement with you, transfers funds for the purchase of your replacement property.

3. You receive your new property.

"Planning Ahead: Navigating Your Land Ownership & Family Legacy" Guide