AGRICULTURE 1031 EXCHANGE

Investments

Mixed-Use Land

Mixed-use land (where a portion of the property is a primary residence, and the other qualifies as property being used for business or investment purposes) can still be eligible for a 1031 exchange. If you file your income taxes as a joint return or you have lived in the farmhouse for at least two years, Section 121 of the Internal Revenue Code (IRC) may apply to you. IRC Section 121 segregates the personal residence from the total sales price of the farm and grants a tax exemption on the primary residence portion of up to $250,000 ($500,000 if joint filing) gain.

Even though land is not depreciable, depreciable developments on the land such as certain storage houses, barns, silos or irrigation systems may increase the total tax bill upon sale because depreciation recapture will apply unless 1031 exchange is utilized. Assets such as those listed above may be known as Section 1245 and 1250 property, which could be subject to depreciation recapture. This means that when you sell your land you may have to “recapture” the depreciation.

Previously harvested crops may not be considered “real property” and therefore may not be exchangeable under Section 1031. One solution may be to sell the unharvested crops along with the land to the buyer, assuming appropriate holding periods have applied.