A little over a month ago, I wrote a blog about Section 12504 of the Farm Bill that was under consideration by the Senate at the time. (You can read it here.) The focus of the blog was the general impact on Section 1031 that a particular subsection of the bill might have. The gist of the whole thing was that the proposal sought to redefine the concept of "like-kind" property, which until now has had a very broad definition when it comes to real estate. (You can exchange raw land for an apartment building, three rental houses for an industrial building, an office complex for a farm, etc.) The provision within the Farm Bill would make it so any land that has been receiving government subsidies (which includes the farms of nearly all family grain farmers) would no longer be considered like-kind to other real estate held for investment or used in the pursuit of a business or trade. The supposed purpose behind this provision is to help keep land prices down because so much land is being purchased through 1031 exchange proceeds, although I don't know how true that is. The other factor involved might be an intention to reduce the amount of ground under subsidy programs (because a farmer can opt out of the subsidy program and have his land then qualify for an exchange). The problem, as mentioned in my first blog, is that the entire concept does little beyond punishing the family farmer for accepting a subsidy that was virtually forced on him in the first place. Now the farmer with no actual heirs, or none willing to take on the burden of the farm, who has worked his entire life in agriculture, all of a sudden has his primary means of the disposition of his land (a Section 1031 exchange) taken away from him. So much for helping the family farmer...
THE NEW INFORMATION
I am unhappy to report that the Farm Bill that has now passed out of the Senate has done so with the provisions regarding Section 1031 pretty much intact. The bill now goes to the House of Representatives, where reason may prevail. Beyond that, should it get through that body, the President has promised a veto of the bill, so we can hang our hats on that for the time being. But once again relating to my first blog on the subject, the crux of the matter is that Congress is now considering Section 1031 of the Internal Revenue Code as low-hanging fruit as to the possibility of raising additional tax dollars. In other words, if they can change the definitions contained within Section 1031 through the Farm Bill, what's to stop them changing other aspects of the exchange process to further restrict our alternatives?
ACTUAL LANGUAGE FROM THE BILL:
For those of you who enjoy this sort of thing, here is the language from the bill itself:
Section SEC. 504. MODIFICATION OF SECTION 1031 TREATMENT FOR CERTAIN REAL ESTATE.
(1) IN GENERAL - Unimproved agricultural real property and improved real property are not property of a like kind.
(2) UNIMPROVED AGRICULTURAL REAL PROPERTY - For purposes of this subsection, the term unimproved agricultural real property means real property -
(A) which is unimproved;
(B) which is used for farming purposes (within the meaning of section 2032A(e)(5)); and
(C) with respect to which a taxpayer receives, in the taxable year in which an exchange of such property is made, any agriculture program payments or Com-modity Credit Corporation loans.(3) EXCEPTION- Paragraph (1) shall not apply with respect to any unimproved agricultural real property which, not later than the date of the exchange, is permanently retired from any program under which any payment, loan, or benefit described in paragraph (2)(C) is made.
If you are so motivated, contact your representatives to let them know how you feel about what I consider to be an attack not only on farmers, but on the very essence of Section 1031 of our tax code.
Ken Tharp
Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.
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Ken, thank you for keeping us up-to-date! Our community is rich with farmers and agriculture, we a proud of it! I would love to see the actual numbers as far as land sales go for 1031. I have a hard time believing this is an effort to keep the land prices down! It's definately an attack on our farmers.
Hi Jan - Thanks for your comments. It's hard to believe that congress would intentionally try to sabotage our nation's farmers. Our Iowa Senator Chuck Grassley (R) is one of the primary sponsors of this bill, and he is a both a farmer himself and a generally strong supporter of farmers. I think it's a case of misguided priorities. In other words, they may be too far out of the loop to even realize what impact their actions will have.
Ken Tharp, Iowa Equity Exchange
Thanks for the update Ken and CONGRATS on the featured post.
Hi Jason - thanks for the congrats. Pardon my stupidity here... I noticed on my profile page that I had a featured post, but darned if I can figure out which one it is or where it's featured. Doh! Can you help me figure it out?
Ken Tharp, Iowa Equity Exchange
Hey can you post this in the Real Estate and Taxes Group?
Ken if you click on Blogs above you'll notice yourself in the featured posts. Instead of the 200 points you usually get you'll get 400!
TaxMan - I'll see what group I can unpost it to in order to slide it over there. That's a good place for it. I wish the limit wasn't five groups...
Jason - I now see that it's featured, but I still don't know where or how it got featured. What's the process for getting featured? Someone has to nominate you?
Ken Tharp, Iowa Equity Exchange
Ken, this blog is now also featured in my group.
TaxMan - Thank you very much. I plan to take a good look at your group tomorrow... it's getting very near my bedtime now!
Ken Tharp, Iowa Equity Exchange
Thank you Ken. This is the kind of Blog post I like to see- full of real data PLUS weighted opinon. (And yes, I am one of the weirdos who reads things like this.)
Ken you get featured by the moderators. They saw your post and thought it was "quality content" and featured it. Featured posts always get more expousre, usually get more comments + the additional 200 points for being featured. Good job-
Sarah - Thanks for the kind words, and glad to know there are some others out there who enjoy getting into the nitty-gritty of it all!
Jason - Thanks, man! You are not only my land guru, but my activerain guru as well!
Ken Tharp, Iowa Equity Exchange
Ken, This got "featured" because it is very good. I'm glad you posted it to All Land.
One question: it says unimproved in the bill. If there are structures on the land is it still considered unimproved?
Bill Roberts
Hi Ken,
I think you're right on about misguided priorities. The more I become involved with the inner workings of my city and gov't, the more I realize that some of the people who make the decisions are so far out of the loop, they don't realize how it their actions truly impact the people or group they are trying to help. I think most of them have good intentions to start, but they just don't stop to consider the longterm. Thanks for adding me on as an associate! I think you're going to be a great person to have in my "toolkit."
Happy Holidays! Jen
Bill - Thanks for the compliment. I wish I could definitively answer your question about what constitutes unimproved property, but I don't feel comfortable providing an answer. I'll give you a thought on the subject, but don't take it as gospel - the primary factor, from what I can tell, is whether or not the owner of the land is receiving a subsidy. Most grain farmers do receive a subsidy. Most grain farms have some sort of structure(s) on their land, certainly. How a piece of land that has a structure (i.e., an improvement) could be considered unimproved is beyond me, but that appears to be what is being said. I hope someone with more information will chime in on this, and I'll certainly keep my eyes open to see whether I can find something that's clear one way or the other.
Jen - I think you're exactly right. A lot of people in government go into their service with good intentions, but they get swayed by one group or another. As far as being in your toolkit, I'll be happy to help any time. Just ask!
Ken Tharp, Iowa Equity Exchange
Bill, I agree with Ken.
Land with a structure on it is usually considered improved, for example, a barn on a farm.
But, if you have just a tool shed on like 5 acres of land, that's not an improvement.
Usually structures that are considered land improvements are inherently permanent, structured from the ground (concrete foundation, etc...), and subject to depreciation.
TaxMan - Hmmm, I thought I had given an expertly-crafted non-answer to Bill. :-) However, now that I've had some time to think about it, plus with your input, I'm inclined to agree with you (and my non-answer, too) that a 160 acre grain farm (for example) with a storage bin on it probably would be considered unimproved property. Particularly if it received a subsidy, in light of the stuff now included in the Farm Bill.
Even though the IRC has been spiffed up and now makes things a lot clearer in regards to what can and can't be done in exchanging, there are still a lot of gray areas. Is this "improved vs. unimproved" issue also a gray area in tax law?
Ken Tharp, Iowa Equity Exchange
The proposed bill creates more questions than it does answers. What will be considered an improvement is going to be difficult ahead of any rules coming out, but I bet Taxman is pretty close with his answer that permanent structures subject to depreciation will be the relied upon standard.
Ken do you remember the question I asked you the other day about how to split parcels for the greatest tax benefit, or least tax consequences later. What if the improvements are split off onto a new tax parcel and unimproved land left in separate parcels? I guess the question is in the event this makes it way to law would it be beneficial to keep improvements on separate parcels from unimproved land?
Generally, I would say an improvement is anything that adds value to the unimproved land, and in my experience, it doesn't make much of a difference because "Real properties generally are of like-kind, regardless of whether the properties are improved or unimproved"(IRS). I've seen improved land go through like-kind exchanges for unimproved land, so I haven't seen improved vs. unimproved play a big role.
Then again, I'm sure it can become an issue when we're talking about farm land. For example, when exchanging farm lands, livestock of different sexes are not considered to be like-kind properties.
So in that sense, I would say that the improved vs. unimproved is defined clearly enough, and for the most part, doesn't make a difference. I think it starts to get gray when you start talking about like vs. non-like property.
Jason - Hmmm, about splitting parcels... I suppose if someone split off a piece of land with an improvement on it, and the owner could substantiate it as improved land, and that particular piece of land wasn't under any subsidy, it could probably be exchanged for any like-kind property. The problems that I see are:
From a strictly exchange point of view, it would probably be a pretty unusual situation where breaking off a piece with improvements on it would make sense.
Just my first thoughts,
Ken
TaxMan - The issue within the Farm Bill is that it seeks to redefine the concept of like-kind as it relates to the exchange of unimproved agricultural land. So when you say "improved vs. unimproved is defined clearly enough, and for the most part, doesn't make a difference," that is presently true. But if the Farm Bill should make it through the House and be signed into law, it will make a difference because they will no longer be considered like-kind.
I'll apologize in advance if I misinterpreted anything you said.
Ken Tharp, Iowa Equity Exchange
Ken, thanks for the details. I will be in touch with congressman and a subscriber to your blog.
Larry - Thanks for leaving a comment. My wife and I are headed down your way today to hang out at Country Club Plaza for a day and a half. Unless we get snowed in there - sounds like there may be a storm brewing.
Thanks again,
Ken Tharp, Iowa Equity Exchange
I'm just now understanding the complexity of exchanging farm land, as it is not something I do very often... ever...
But I completely hear what you are saying now. It took a little while for it to click in my mind.
I totally missed the line that said "Unimproved agricultural real property and improved real property are not property of a like kind"
Wow, now I feel like one of those people who just comment without reading the posts, woops!
TaxMan - Well, I wasn't sure, but I thought maybe you had overlooked something in the initial blog post. Certainly understandable; it's kind of long. I almost didn't say anything, because I didn't want to upset you if I misinterpreted your comment, but now I'm glad I did!
Thanks for taking it in the spirit it was intended: just to make sure you clearly understood the issue.
Ken Tharp, Iowa Equity Exchange
Wishing You HAPPY HOLIDAYS and Best Wishes for A GREAT YEAR 2008.
TommyThis is just an update. The provision has been deleted from the Farm Bill. Yea!
Bill - Thank you, yes, that is correct. I posted a blog on that fact about twenty minutes after it was announced last Friday:
Would You Like Some Good News? Success Regarding Like-Kind Status in the Farm Bill.
Thanks again, Ken
Cool Beans! Does that mean unimproved agricultural property can still be exchanged for improved real property?
Niman - That's exactly what it means. Excellent news that full exchange options have been preserved for owners of unimproved agricultural property.
- Ken