farm to rental investment on 1031

Dallas, TX · Member since 2015 · 13 posts · 1 vote

I'm in the process of selling my farm, am I able to use my 1031 to get rental homes? sorry for such a noobie question, I tried searching but couldn't come to find anything conclusive

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Dave FosterBusiness Member

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

@Young Nguyen, Not a noob question and actually one that has some potentially very good answers for you.

First of all a 1031 exchange is a sale of any type of investment real estate and a purchase of any other type of investment real estate. So you can definitely go from agricultural to residential.

Secondly all the property you place into the 1031 must be used for investment. In the case of farms there are usually two components - the homestead and the rest of the land. The homestead (primary residence) portion of the farm will not qualify for 1031 treatment. It is actually eligible for the much better primary residence exclusion. If you have lived in the homestead portion of the farm for 2 out of the 5 years previous to sale then you get to take the first $250K ($500K if married) in profit tax free. The remainder of your farm then goes into your 1031 and you can use it tax deferred to buy residential rentals.

The application of 1031 to the family farm to generate tax free profit as well as moving tax deferred from farming into a hopefully more lucrative and less demanding form of real estate investing is one of the most powerful uses for the 1031 exchange.

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
9y
@Young Nguyen, Not a noob question and actually one that has some potentially very good answers for you.
First of all a 1031 exchange is a sale of any type of investment real estate and a purchase of any other type of investment real estate. So you can definitely go from agricultural to residential.
Secondly all the property you place into the 1031 must be used for investment. In the case of farms there are usually two components - the homestead and the rest of the land. The homestead (primary residence) portion of the farm will not qualify for 1031 treatment. It is actually eligible for the much better primary residence exclusion. If you have lived in the homestead portion of the farm for 2 out of the 5 years previous to sale then you get to take the first $250K ($500K if married) in profit tax free. The remainder of your farm then goes into your 1031 and you can use it tax deferred to buy residential rentals.
The application of 1031 to the family farm to generate tax free profit as well as moving tax deferred from farming into a hopefully more lucrative and less demanding form of real estate investing is one of the most powerful uses for the 1031 exchange.
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Young Nguyen
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Dallas, TX · Member since 2015 · 13 posts · 1 vote
9y
Thank you David foster
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Bill ExeterBusiness Member
1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
9y
Hi @Young Nguyen,
Yes, absolutely. There are two requirements that must be met for a successful 1031 Exchange transaction.
The first requirement is that you must satisfy the Qualified Use test. The Qualified Use requirement means that your relinquished properties that you are selling and the Replacement Properties that you are buying must be held for rental, investment or business use. Your farm property would absolutely satisfy the Qualified Use test, and properties acquired for rental purposes would also absolutely satisfy the Qualified Use test.
The second requirement is that you must satisfy the Like-Kind test. There is lots of incorrect information floating around the Internet today about what qualifies as like-kind property. This requirement simply means that you must acquire real estate if you have sold real estate. Farmland and homes are both real estate and would satisfy the like-kind requirements.
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Dan Scarborough
Palmetto, GA · Member since 2016 · 27 posts · 11 votes
9y
I'm looking for farms in Northwest Georgia to buy (Bartow, Paulding, Polk, Floyd, etc.) .... Especially interested in working farms with rentable homes on land with good access to water or currently producing wells.
Also seeking old, overgrown farmland with volunteer stands of timber, possibly owned by disinterested absentee owners weary of paying taxes on non-income-producing acreage.
How do buyers amd sellers connect on Bigger Pockets?
..Also, how can I prospect for these types of properties in Bigger Pockets?
DanJS
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Steve Armstrong
Investor · Prospect, KY · Member since 2017 · 62 posts · 34 votes
8y
Questions: First, what if the farm was small and has not generated much in the way of profit recently? Second, assuming their were multiple heirs to the farm, would a family trust be beneficial?
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