What are you plans?
When you sell your farmland, it’s not the sale price that determines how much money you walk away with; it’s what you plan to do with the money.
Most of our clients who sell their land because they are ready to get out of farming choose to reinvest the proceeds in a qualified real estate investment called a 1031 Exchange. This can significantly reduce or eliminate the impact of capital gains taxes and provide you with a stable income stream that is entirely passive, requiring little to no involvement on your part. The most common investments are commercial triple net (NNN) opportunities with 20-year leases and regular monthly payments. NNN lease means that the tenant pays the property expenses, building repairs and maintenance, property taxes, and utilities.
If you receive the money directly, either by check or bank wire, you may have to pay capital gains taxes to the state of California and the federal government. Depending on how much your land has appreciated, your tax bill could be 50% or more of the sales price.
As a Hoekstra and Associates Real Estate Client, we will provide you with a list of qualified investment options that make the most sense for you and your situation. We tour the investments with you, write the offers, and arrange legal counsel to review leases and purchase agreements.
We walk with you, step by step, from evaluations through closing to help ensure every detail is handled and deadlines are met.
We love helping good people make wise decisions on the best use of their land sale proceeds.
1031 Exchange
If you’ve held your land for any length of time, it’s undoubtedly gone up in value. When
you sell it, the state and federal governments will take a third or more of your sale price in capital gains taxes, unless you reinvest the proceeds into a qualified replacement investment called a 1031 Exchange.
A 1031 Exchange can provide you with a stable income that is often greater than your farm ever produced.
As a free service to our clients, Hoekstra and Associates researches, identifies, and negotiates exchange opportunities with corporate-backed guaranteed leases.
Benefits to you:
- You get a guaranteed income
- You avoid or defer both state and federal capital gains taxes
- You have nothing to negotiate after the purchase
- You have nothing to manage
- The investment is completely passive
What is a 1031 Exchange?
The IRS 1031 Exchange Program (Internal Revenue Code Section 1031) is one of the last great opportunities to build wealth and save on taxes. It allows you to exchange one income-producing property (farmland, business, commercial, or investment property) for another while deferring the Capital Gains tax that would ordinarily be due upon the sale.
Through a 1031 Exchange, you can defer Federal capital gains tax, state ordinary income tax, net investment income tax, and depreciation recapture on the sale of investment property if specific criteria are met, including:
- Reinvest all proceeds in the purchase of Replacement Property of equal or greater value.
- Replacement Property must be identified within 45 days of the close of the sale.
- Replacement Property must be purchased within 180 days of the close of the sale.
- If the purchase price of the Replacement Property is less than the sale price of the Relinquished Property, taxes may be due on the difference.
- Any cash or other non-like-kind property you receive during the exchange is subject to taxation.
- Capital gains taxes are deferred, not eliminated, and must be paid if the Replacement Property is sold without conducting another exchange.
Benefits of a 1031 Exchange
A 1031 Exchange is an attractive strategy for investors looking to defer capital gains taxes and optimize their investment portfolios.
Here are some key benefits:
- Defer Taxes: Federal and State Capital Gains & Depreciation Recapture
- Consolidate or diversify a Real Estate Portfolio without tax implications
- Create a secure, stable income
- Exchange Property Types (Land, Industrial, Multi-Family, Office, Retail, Residential, Easements)
- Easily Invest in other geographic markets
- Diversify into other real estate investment opportunities
- Build and preserve Wealth
- Estate Planning: Stepped Up Basis
- Risk Mitigation
- Increase Purchasing Power
It’s important to note that while 1031 exchanges offer substantial benefits, they also have specific rules and timelines that must be followed diligently to qualify for these advantages. While Hoekstra and Associates strive to provide accurate counsel, you should seek professional advice from tax experts to ensure compliance and maximize the benefits of a 1031 exchange.
Types of 1031 Exchanges
1. Simultaneous Exchange
The Relinquished Property is sold, and the Replacement Property is purchased on the same day.
2. Delayed Exchange (Most common type of Exchange)
The Relinquished Property is sold first, and Replacement Properties are identified within 45 days, with the purchase transaction completed within 180 days of the sale of the Relinquished Property.
3. Reverse Exchange
Replacement Property is purchased before the sale of the Relinquished Property. This type of 1031 Exchange requires An Exchange Accommodation Titleholder (EAT) to hold the title on the Replacement Property until the Relinquished Property is sold.
4. Improvement / Build-to-Suit Exchange
Proceeds from the sale of the Relinquished Property are used to complete construction or improve the Replacement Property during the 180-day exchange period.
It’s important to note that while 1031 exchanges offer substantial benefits, they also have specific rules and timelines that must be followed diligently to qualify for these advantages. While Hoekstra and Associates strive to provide accurate counsel, you should seek professional advice from tax experts to ensure compliance and maximize the benefits of a 1031 exchange.