{"id":513,"date":"2013-10-09T22:31:34","date_gmt":"2013-10-09T22:31:34","guid":{"rendered":"https:\/\/swanlandco.com\/2013\/10\/09\/irc-section-1031-exchange-powerful-financial-tool-families-selling-farm-or-ranch\/"},"modified":"2024-02-15T19:57:49","modified_gmt":"2024-02-15T19:57:49","slug":"irc-section-1031-exchange-powerful-financial-tool-families-selling-farm-or-ranch","status":"publish","type":"post","link":"https:\/\/www.swanlandco.com\/2013\/10\/09\/irc-section-1031-exchange-powerful-financial-tool-families-selling-farm-or-ranch\/","title":{"rendered":"A Powerful Financial Tool For Families Selling A Farm or Ranch: IRC Section 1031 Exchange"},"content":{"rendered":"

The IRC Section 1031 Exchange is one of the most powerful tax-saving and wealth-building tools available for people selling highly appreciated real estate.\u00a0 A properly structured 1031 exchange allows a family selling a farm or ranch to sell land, to reinvest the proceeds in other \u201clike-kind\u201d real estate, and defer capital gain taxes.<\/p>\n

<\/p>\n

To quote the tax code, IRC Section 1031 (a)(1) states:\u00a0 “No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment.”<\/em><\/p>\n

Effective January 1, 2013, capital gains tax rates have increased, making tax-saving strategies such as the 1031 Exchange and Charitable Remainder Trust even more advantageous.\u00a0 In addition to higher capital gain tax rates, there is a new 3.8% healthcare tax on investment income including income from the sale of real estate.<\/p>\n

There are many potential benefits for a taxpayer who successfully executes a 1031 exchange.\u00a0 Some of these include:<\/p>\n

1. Tax Deferral (Immediate & Indefinite)<\/strong><\/h3>\n

In a properly executed 1031 exchange, capital gain taxes are deferred and transferred to replacement property. Tax is not due until the taxpayer sells the replacement property without utilizing a 1031 Exchange. Since there is no limit to the number of exchanges a taxpayer can complete, it is possible to defer the payment of tax indefinitely.<\/p>\n

The 1031 exchange is commonly referred to as a tax \u201cdeferred\u201d exchange, implying that taxes are not eliminated, only deferred until the replacement property is later sold in a taxable transaction.\u00a0 However, it is possible to potentially eliminate capital gain taxes altogether on the sale of property by exchanging into and holding property until death.\u00a0 Under current tax law, heirs of a descendant\u2019s property receive a \u201cstep-up\u201d in basis of the property\u2019s tax basis to its fair market value upon death.\u00a0 This step-up in basis could conceivably enable the heirs to inherit property and then sell the property for fair market value soon after the decedent\u2019s death and pay little or no tax.\u00a0 Thus, by employing the 1031 exchange until death, it may be possible to not only defer taxes on the sale of property, but permanently eliminate them.\u00a0 Some refer to this strategy as \u201cswap until you drop\u201d.<\/p>\n

2. Improvement in Return on Investment (ROI)<\/strong><\/h3>\n

A typical farm or ranch has a very low cash flow rate of return.\u00a0 By selling and exchanging land into other types of commercial real estate, a family may be able to greatly increase their annual cash flow rate of return.<\/p>\n

3. Consolidation or Diversification<\/strong><\/h3>\n

Real estate investors who have accumulated multiple properties may eventually decide to consolidate their properties into one or a small number of larger assets.\u00a0 Conversely, as is the case with most farm and ranch families, one large real estate asset can be exchanged into multiple properties. Exchanging into different types of properties and in different geographic locations can be an effective risk reduction strategy.<\/p>\n

4. Elimination of Active Management of the Investment<\/strong><\/h3>\n

Operating a farm or ranch involves a lot of hard work.\u00a0 Exchanging farm and ranch land into other passive real estate investments or into properties that are professionally managed, may enable a family to free themselves of the day-to-day activities of running their farm or ranch.\u00a0 Ironically, an agricultural family can often sell their place and increase their income without having to work as hard for it.<\/p>\n

5. Wealth Building<\/strong><\/h3>\n

The greatest potential benefit from using a 1031 exchange may be the ability to preserve all of the equity in the relinquished property.\u00a0 Deferring taxes on a sale allows the seller to reinvest the full sales proceeds, undiluted by tax. The ability to invest the money that would have gone to taxes in additional real estate may enable a family to grow wealth and generate more income for retirement.<\/p>\n

Consider the following example:\u00a0 A Montana couple sells land for $5 million with a cost basis of $1 million.\u00a0 Assuming 2013 tax rates (23.9% combined federal and state capital gains tax and 3.8% Medicare Surtax), they will pay approximately $1,246,000 in taxes.<\/p>\n

If this same couple were to do a 1031 exchange on the full $5 million sale, this $1,246,000 tax cost could be invested in additional real estate.\u00a0 Assuming the real estate grew at an average annual compound rate of 7% (income plus appreciation), in 20 years this $1,246,000 would be worth approximately $4.8 million.\u00a0 Not only would this couple benefit from the additional income the real estate would generate while they are alive, if they hold the property until they die and if real estate continues to receive a step up in basis upon death, they could potentially pass close to $5 million more to their heirs!<\/p>\n

There are complex rules and strict time parameters for completing a successful 1031 exchange.\u00a0 To view the complete Wealth Guide titled: IRC Section 1031 Exchange: A Powerful Financial Tool For The Agricultural Family, click here:\u00a0 http:\/\/solidrockwealth.com\/wealth-guides\/<\/p>\n

Article Provided by Chris Nolt – Solid Rock Wealth Management<\/a><\/p>\n

\n

About Solid Rock Wealth Management<\/h4>\n

Chris Nolt is the owner of Solid Rock Wealth Management and Solid Rock Realty Advisors, sister companies dedicated to working with families selling a farm or ranch.\u00a0 Their strategies are designed to save tax on the sale, to create passive income from sale proceeds and to maximize inheritance for children and grandchildren.<\/p>\n

For more information, contact:<\/p>\n

Solid Rock Wealth Management<\/p>\n

2020 Charlotte Street<\/p>\n

Bozeman, MT 59718<\/p>\n

406-582-1264<\/p>\n

www.solidrockwealth.com<\/a><\/p>\n

www.solidrockproperty.com<\/a><\/p>\n

Securities and advisory services offered through Independent Financial Group, LLC (IFG), a registered broker dealer and investment advisor, member FINRA\/SIPC.\u00a0 IFG, Solid Rock Wealth Management and Solid Rock Realty Advisors, LLC are not affiliated entities.\u00a0 This material was created to provide accurate and reliable information on the subjects covered. It is not, however, intended to provide specific tax or legal advice, nor is it an offer to buy or sell securities. Tax information provided can be sourced at www.irs.gov<\/a> or your state\u2019s revenue department website.\u00a0 Because individuals\u2019 situations and objectives vary, this information is not intended to indicate suitability for any particular individual.\u00a0 The 1031 exchange and charitable remainder trust are complex tax codes and the services of an appropriate tax or legal professional should be sought regarding your individual situation.<\/p>\n","protected":false},"excerpt":{"rendered":"

The IRC Section 1031 Exchange is one of the most powerful tax-saving and wealth-building tools available for people selling highly appreciated real estate.\u00a0 A properly structured 1031 exchange allows a family selling a farm or ranch to sell land, to reinvest the proceeds in other \u201clike-kind\u201d real estate, and defer capital gain taxes.<\/p>\n","protected":false},"author":1,"featured_media":9251,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[17,18],"tags":[],"acf":[],"yoast_head":"\nIRC Section 1031 Exchange: A Powerful Financial Tool for Selling- Swanland Company<\/title>\n<meta name=\"description\" content=\"Discover the power of the IRC Section 1031 Exchange for maximizing tax savings and wealth growth when selling appreciated your ranch or farm.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, 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