These four numbers-1031-have a lot of meaning to people in the farm community. They can be a very lucrative four numbers for some, while for others it's a brick wall in expanding a farming business.
A 1031 exchange is an Internal Revenue Code rule. It allows a taxpayer to sell income, investment, or business property and replace it with like-kind replacement property without having to pay federal income taxes on the transaction. Examples of like-kind property for 1031s are apartments, commercial, condos, duplexes, and raw land.
IRS 1031 exchanges in the farm community basically apply to landowners around metropolitan areas selling their property at a high price and taking the revenue and investing in other farm property. The seller can purchase more acres with the proceeds. For example, say a farmer in a northeastern collar county sold 40 acres for a development at $50,000 an acre. The $2 million in revenue could be used to purchase 500 acres valued at $4,000 an acre in a more rural community.
This is a great deal for the seller, but for a young farmer or family wanting to expand by bringing a son or daughter into the farm operation, 1031 exchanges compete and make it very difficult to purchase land.
There's a specific timeline for 1031 exchanges. Within 45 days of selling the relinquished property, the seller must identify a suitable replacement property. There's also a 180-day exchange period, and the replacement property must be received by the taxpayer within this exchange period. The exchange period ends within the earlier of 180 days after the date on which the taxpayer transfers the property relinquished or the due date for the taxpayer tax return for the taxable year in which the transfer of the relinquished property occurred. Both the 45-day identification period and 180-day exchange period are strictly adhered to-even if they fall on a weekend or holiday.
The Illinois Farm Bureau (IFB) annual meeting is December 5 to 8 in Chicago. At the meeting, nearly 400 farmers from throughout Illinois will probably discuss and debate 1031 exchanges. In early November, the IFB Resolutions Committee-primarily county farm bureau presidents-proposed policy that would require an individual involved in 1031 land exchange to "materially participate" in farm use of their newly purchased land for a 10-year period.
Resolutions Committee members mulled other measures, but the 10-year requirement was seen as an effective compromise to address the concerns of younger producers trying to acquire property, older farmers preparing for retirement, and those concerned about migration of farmers from one region to another. We'll find out at the state annual meeting in December what delegates decide to do with this proposed policy.
The 1031 exchanges have been a hot topic for decades, and it looks like they'll continue to be. Farm Bureau is concerned with farmland preservation. Food, fiber, and fuel are three good reasons to be concerned. IBI