Farmland held in S-Corp- perpetual easement question.

Minneapolis, Minnesota
1031 Exchanges
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Farmland held in S-Corp- perpetual easement question.

Sean Haberman
Member since 2022 · 12 posts · 6 votes

Hello,

I am working with a client who has farmland held in an S-Corp (current tax basis is approx. 5% of market value), It seems there is not a way to sell this property without having to pay capital gains, since it is unfortunately held in an S-Corp.

There is an option to sell a perpetual conservation easement to the land while still maintaining ownership of the land. Would the proceeds from the perpetual easement be 1031 exchangeable? If so, would this still cause issue with the S-Corp tax rules?

Looking for any and all options!

Thanks,

Sean

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
2y

@Sean Haberman, the easement implies a beneficial interest in the land.  Since "perpetual" also crosses the 30 year period that the IRS likes for these kind of things.  It is possible that they could do a 1031 exchange on the sale of the easement.  They will need to get a legal opinion that the easement does create a beneficial interest.  And that risk of loss of that interest has passed to the buyer.  

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  • Henry ClarkPro Member
    Developer · Member since 2020 · 4k+ posts · 4k+ votes
    2y

    Talk with your tax person or a 1031 Intermediary.  1031 must be land to land.  Pay the taxes and move on.

    They should be able to make back the taxes.  Example:

    $2,000,000 gain after basis at 20% across the board to keep it simple.  $400,000 tax.

    Again, keep it simple.  Say $1,600,000 cash in hand.  

    1. You're in the REI business or any kind of business. They should be able to take $1,600,000 and recoup the taxes. They won't make that much money as farm ground. The potential for farm price escalation is getting smaller and smaller.

    2.  Depending on the size and location of the acreage, I would split off part of it and subdivide and sale as business or house lots.  Leave a path to the back for the remaining farm ground.

    It's a numbers game, don't let greed (not paying taxes) get in the way.

    1Reply
  • Sean Haberman
    OP
    Member since 2022 · 12 posts · 6 votes
    2y

    Thanks for the reply! They are farmers so they intend to purchase more farmland. Farmland has proved to provide 10%+ returns. Also, I am pretty certain you are able to 1031 exchange land into alternate real estate investment’s. 

    2Reply
  • Henry ClarkPro Member
    Developer · Member since 2020 · 4k+ posts · 4k+ votes
    2y
    Quote from @Sean Haberman:

    Thanks for the reply! They are farmers so they intend to purchase more farmland. Farmland has proved to provide 10%+ returns. Also, I am pretty certain you are able to 1031 exchange land into alternate real estate investment’s. 


     Are you drumming up business or asking advice?  My point is you can't do a 1031 on an Easement. Yes, you can do Land to a Laundromat.   If they are farmers and want to keep the land, why are you asking if they can sell it?  And why do they care if they have to pay taxes since it is an S corp, if they don't plan to sell it?  Going through the same discussion on my wife's family farm.

    2Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    2y

    @Sean Haberman, the easement implies a beneficial interest in the land.  Since "perpetual" also crosses the 30 year period that the IRS likes for these kind of things.  It is possible that they could do a 1031 exchange on the sale of the easement.  They will need to get a legal opinion that the easement does create a beneficial interest.  And that risk of loss of that interest has passed to the buyer.  

    The 1031 Investor5137 Reviews
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    4Reply
  • Sean Haberman
    OP
    Member since 2022 · 12 posts · 6 votes
    2y
    Quote from @Dave Foster:

    @Sean Haberman, the easement implies a beneficial interest in the land.  Since "perpetual" also crosses the 30 year period that the IRS likes for these kind of things.  It is possible that they could do a 1031 exchange on the sale of the easement.  They will need to get a legal opinion that the easement does create a beneficial interest.  And that risk of loss of that interest has passed to the buyer.  

    Thank you for the info! Appreciate it. 
    0Reply
  • Sean Haberman
    OP
    Member since 2022 · 12 posts · 6 votes
    2y
    Quote from @Henry Clark:
    Quote from @Sean Haberman:

    Thanks for the reply! They are farmers so they intend to purchase more farmland. Farmland has proved to provide 10%+ returns. Also, I am pretty certain you are able to 1031 exchange land into alternate real estate investment’s. 


     Are you drumming up business or asking advice?  My point is you can't do a 1031 on an Easement. Yes, you can do Land to a Laundromat.   If they are farmers and want to keep the land, why are you asking if they can sell it?  And why do they care if they have to pay taxes since it is an S corp, if they don't plan to sell it?  Going through the same discussion on my wife's family farm.

    I am asking advice. They are hoping to sell this land to purchase different land and would like to eliminate a taxable event. We have been told that it is not possible to do so since the property is held in an S-Corp. I am just looking for other opinions. Trying to look at all options. 
    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    2y

    @Sean Haberman, The S corp has no bearing on the 1031 exchange.  It can do a 1031 exchange on a sale of real estate.  Because the S corp files a tax return it is it's own taxpayer.  So, the only limitation is that the S corp has to sell the old property (or easement if that is what's decided).  And the s corp has to take title to the replacement property in the 1031 exchange.

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    1Reply
  • Henry ClarkPro Member
    Developer · Member since 2020 · 4k+ posts · 4k+ votes
    2y
    Quote from @Sean Haberman:
    Quote from @Henry Clark:
    Quote from @Sean Haberman:

    Thanks for the reply! They are farmers so they intend to purchase more farmland. Farmland has proved to provide 10%+ returns. Also, I am pretty certain you are able to 1031 exchange land into alternate real estate investment’s. 


     Are you drumming up business or asking advice?  My point is you can't do a 1031 on an Easement. Yes, you can do Land to a Laundromat.   If they are farmers and want to keep the land, why are you asking if they can sell it?  And why do they care if they have to pay taxes since it is an S corp, if they don't plan to sell it?  Going through the same discussion on my wife's family farm.

    I am asking advice. They are hoping to sell this land to purchase different land and would like to eliminate a taxable event. We have been told that it is not possible to do so since the property is held in an S-Corp. I am just looking for other opinions. Trying to look at all options. 

    Option.  Depending on location. Pay the taxes. Dissolve the S Corp.  Subdivide the road side properties.  Take $8,000 per acres and sell for $30,000 to $50,000 per acre.  Cover the tax impact. 

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