Our last post discussed the five most common options available to farmers considering selling their farmland. As a refresher, the most common options available to you when considering a sale of your farm are:
- Keep the Farm and Keep Farming
- Sell the Farm to Your Heirs
- Keep Your Farm and Rent It
- Sell the Farm
- Exchange the Farm
If you don’t pursue any of the first three options, you’ve decided a farm sale is the best approach to meet your objectives. Farmers can either sell their farmland by a traditional listing, through auctions (online or live), or by utilizing a 1031 exchange.
Thinking Traditional
A traditional farm sale is often driven by a farmer’s desire to take advantage of market conditions and sell at the highest value possible. Also, a farm that has been in a family for generations may have dozens of owners whose interests are not always aligned. In that case, selling the farm may be a reasonable option.
The 1031 Exchange Option
If you are thinking about using a 1031 exchange to sell your farm, you are likely more motivated by the tax-deferral benefits of the exchange than for other reasons. Yes, you’re interested in getting top dollar for your farm. Still, the ability to put your entire sales proceeds to work in another investment property and potentially grow your wealth is the common reason farmers select a 1031 exchange strategy.
The Appeal of DSTs
And there are several other underlying advantages a 1031 exchange can offer owners selling a farm, particularly if they use the Delaware statutory trust (DST) structure for their exchange. In a previous post, you may remember how the DST satisfies the ‘like-kind’ replacement property requirement of a 1031 exchange and offers additional potential benefits that may tilt your decision about selling your firm towards the 1031 exchange option.
Remember, in addition to providing the tax-deferral benefits of a 1031 exchange, a few other DST advantages may include:
Passive Investment: No Management Responsibilities
A DST is a passive investment, meaning you have no responsibility for managing the investment property. Instead, a professional management firm assumes those duties.
Potential for Consistent Retirement Income
DSTs generate earnings from tenant rent payments which, in turn, are used to help provide consistent monthly cash flow to you.
Access to Institutional-Quality Property
A DST allows you to own a fractional interest in multi-million dollar institutional-quality properties that would be out of reach for most investors.
Portfolio Diversification
Because many DSTs have lower minimum investments of approximately $100,000, you may be able to invest in multiple DSTs, providing investment diversification geographically, by property type, and by the sponsor.
Estate Planning
Under current tax laws, your beneficiaries will receive a step-up in basis on inherited investment property upon your death. That means there will be no capital gains tax on the appreciated value of your farmland.
With any family-owned property, disputes can arise among heirs inheriting investment property because they may have different views on what to do with the property.
Since the DST structure allows heirs to receive their own fractional interest in the Trust, when the DST liquidates, each heir can decide if they want to receive their proceeds and pay capital gains tax or reinvest in another DST.
If you would like to further explore the 1031 exchange or DST structure for your farm sale, fill out the form on the contact us page. A representative will call you within 24-48 hours.