She purchases $500,000 of grain bins which reduces her Schedule F income by $500,000. Here is an example:ĭebbie sells the tile outside of the exchange and reports a $400,000 ordinary gain. This is because the gain is not subject to self-employment tax, whereas the purchased Section 1245 property can be fully depreciated and reduce SE tax. Now, in some cases where there is either no state income tax or the state follows federal on 100% bonus depreciation we would prefer the gain not be deferred. It it is less than $400,000, then the difference will be taxable to Debbie. of at least $400,000 of value, she will defer the gain. If the new land has tiling, hog barns, dairy parlor, grain bins, etc. Let’s look at an example:ĭebbie had tiling worth $400,000 on her sale. In order to defer the gain, the farmer must invest in other Section 1245 property of equal or greater value to completely defer the gain. This is considered to be Section 1245 real property even though it may have been fully depreciated. However, many parcels of land have land improvements. She rolls all of the cash into the purchase and can either pay the rest with any combination of debt or cash. Here is an example:ĭebbie sells a quarter section for $2 million in Iowa and at closing $1.5 million is transferred to the exchange company and $500,000 of debt is paid. In this case, the farmer needs to invest the net proceeds from the sale and all of the cash proceeds transferred to the exchange facilitator. This is very easy if the only property sold is raw land with no buildings or land improvements such as tiling.
However, many of them also plan on deferring the gain into other real estate using a tax-deferred exchange under Section 1031. Many farmers are considering selling their land this year due to rapid appreciation in the value or to escape any possible capital gains tax increases.