Basic Facts of 1031 Exchange Transaction

Mr. and Mrs. White (names changed) inherited 15 acres of agricultural property from their family many years ago. They used the land as additional land to run cattle. The White’s knew the fair market value of this land was about $500,000, so they wanted to sell this piece of property in order to grow their real estate investment portfolio. Using WealthBuilder 1031’s capital gains tax calculator, the White’s calculated their anticipated tax due; they realized they were facing over $65,000 in capital gains tax that they didn’t want to pay. They considered a strategy involving a 1031 exchange agricultural land transaction to mitigate this tax burden.

How a 1031 Exchange Works

Being savvy investors, the White’s knew they could take advantage of a 1031 like-kind exchange to defer capital gains tax which would allow them to use the $65,000 (that they would normally pay Uncle Sam) as additional equity toward their next investment property. Essentially this would increase their investment and ultimately grow their wealth. Their main focus was on a 1031 exchange agricultural land deal.

Section 1031 of the IRS tax code is a tax provision that allows a taxpayer to defer federal taxes on the capital gains from the sale of property if the proceeds are reinvested in another investment property. Instead of paying taxes on the gains from the sale of the original property, the gains are rolled over into the purchase of a replacement property. Thus, the rolled-over funds become equity in the new property. This is particularly useful for those looking to benefit from a 1031 exchange agricultural land scenario.

Step One – Relinquished Property Sold

Having done 1031 exchanges in the past, the White’s were aware of the strict IRS deadlines involved. They knew to engage their qualified intermediary, WealthBuilder 1031, before the closing. The White’s went under contract with a buyer who offered $35,000/acre, or $525,000 total. The offer was accepted. Since the White’s wanted to cover all of their capital gains tax, they needed to find replacement properties that are equal to or greater in value to the selling price of their relinquished property. Understanding the intricacies of a 1031 exchange agricultural land deal was crucial for them to complete their Milam County, Texas 1031 exchange.

Step Two – Replacement Property Identified

After closing on their relinquished property, the Whites knew they had 45 days to identify replacement properties. They could identify up to three options and had 180 days to complete the transaction. They chose three agricultural properties, each worth $175,000. The Whites made sure to identify the properties before the 45-day deadline. They successfully completed their 1031 exchange for agricultural land.

Step Three – Replacement Property Acquired

Within 180 days, the Whites purchased all three identified replacement properties. The land allowed them to increase their cattle acreage. They used all the equity from their sale to buy the new agricultural properties. This allowed them to defer all capital gains on the property they sold. The Whites reported their 1031 exchange to the IRS when they filed taxes for that year.

Conclusion

Using this 1031 strategy, the White’s were able to sell their inherited agricultural property, purchase three new agricultural properties, defer all capital gains tax, increase their equity, and build their wealth. As we like to say, WealthBuilder 1031 helped them “Sell Property, Defer Taxes, & Build Wealth.” If you need help with a 1031 exchange involving agricultural property, we’d be glad to help.