A Publication of WTVP

There’s been a dramatic increase in farmland values recently. In fact, Illinois farmland rose 20 percent in 2004, and there will be further increases for farmland in 2005 as the calendar year comes to a close. The 1970s also witnessed a wide upswing in farmland values. For a period of 10 years, this era saw land values increase 15 and 20 percent each year.

Farmland values peaked in 1981, and during the following six years, prices dipped an average of approximately 10 percent each year. Then the drought of 1988 took hold. Prices rebounded as the supply of farm commodities ran low, and this created the beginning of another upswing cycle in land values.

From 1988 to 1998, land values increased again at a more modest average annual rate of nearly 6 percent. Another cycle peak in farmland values came in 1998. Land values declined the next couple of years before rebounding at an astonishing rate in 2002. The two-year downturn in 1999 and 2000 can be attributed partially to money flowing into the stock market instead of farmland.

Why the sudden upturn in land values the past three years? Many would say 1031s. At the 2004 Illinois Farm Bureau annual meeting, delegates debated 1031 exchanges. Known as U.S. Internal Revenue Code 1031, it permits the deferral of capital gains tax if real estate gains are reinvested in “like-kind” property. Under the provision, the individual must exchange real estate for real estate within a fixed time frame.

The “like-kind” requirement of 1031 generally allows the exchange of investment real estate of any kind in any location. For example, the sale of an apartment building in Chicago could be offset by the purchase of farmland in rural Peoria County. Or the sale of 100 acres of developable farmland in Will County could be offset by the purchase of 1,000 acres of farmland in Fulton County.

For the past year, Farm Bureau members have debated and discussed the pros and cons of 1031s. Ad hoc committees have studied the issue, statewide teleconferences have been held, and county Farm Bureaus have submitted resolutions concerning 1031s.

Several ideas for minimizing 1031’s impact on farmland values have been discussed. One was to extend the timeframe allowed for reinvestment under 1031. Suggestions were to increase the time allowed to find a replacement property from 45 days to six months and increasing the transaction closing date timeframe from six months to one year. A second idea is to require an extended period—possibly 10 years—of material participation in the farming operation of replacement property. Another idea is to limit the gain that could be sheltered under 1031.

Farm Bureau members will once again gather from all corners of Illinois for the state annual meeting to further debate 1031s December 3 to 6. We’ll soon find out whether delegates can come to any conclusions and whether the 1031 issue finds its way into Farm Bureau policy. IBI