By Michele F. Mihaljevich
INDIANAPOLIS – Some agriculture-related groups are expressing concern over how a proposed change to Section 1031 like-kind exchanges could impact farmers and ranchers.
Section 1031 allows landowners to defer paying capital gains taxes when they sell investment property and use those proceeds to purchase other real estate. Capital gains taxes would be paid when the second property is sold.
As a part of his American Families Plan announced in April, President Joe Biden proposed capping the value of deferred taxes under Section 1031 of the tax code at $500,000. There is currently no monetary limit.
The president’s $1.8 trillion plan provides spending for education, childcare and to extend certain tax cuts for low- and middle-income families. The proposal also includes about $1.5 trillion in tax increases, such as raising the top tax rate on the wealthiest Americans to 39.6 percent and repealing stepped-up basis.
The combination of these tax code changes “could really impact agriculture in a negative way,” said Bob White, director of national government relations for the Indiana Farm Bureau. “If you combine the proposed tax changes together, I believe it will lead to increased consolidation in agriculture. Farmers and landowners will need to sell to pay taxes. The land will go to a farmer down the road to increase the size of that operation. Section 1031 has worked well for decades for farmers and small businesses. Without it, farmers may have to incur debt or delay improvements to their operations. You eliminate it, there are a lot of economic opportunities that go away right away.”
Farmers and landowners might use Section 1031 in several ways, he noted. For example, they might want to sell land in an area designated for annexation near a city and purchase land away from the expansion. They may seek more productive farmland or want to help minorities, beginning or young farmers who may not be able to get a loan. They may also plan to pass on the land to another member of the family.
R.D. Schrader, president of Schrader Real Estate & Auction Co., said he works with farmers using Section 1031 on a fairly regular basis.
“There’s a lot of motivation to use the 1031 exchange to defer taxes,” he said. “Section 1031 does a lot to encourage real estate buying and selling activity. A change to Section 1031 has the potential to have big consequences. Land makes up more than 80 percent of a farmer’s balance sheet. Section 1031 was originally developed for farm families. Farm families have unique assets that have been in the family for a lot of years. Capital gains taxes can be large.
“Every administration, whether Republican or Democrat, addresses the 1031 provision one way or another. Over the years, we’ve seen some small consequences but not major changes. This administration’s proposal has some of the most extreme changes I’ve seen.”
The proposed repeal of stepped-up basis could also have a huge impact on farmers, Schrader said.
The National Cattlemen’s Beef Association (NCBA) is working with members of Congress, especially those from urban and suburban areas, to help them understand the importance of Section 1031 and other tax code provisions to farmers and ranchers, said Danielle Beck, the organization’s senior executive director of government affairs. “Their constituents still need to eat,” she pointed out. “They understand and want to support the concept of family ownership in agriculture. If some of these changes are enacted, that could further drive consolidation, drive families out and into a more corporate structure.”
The number of acres available for viable production has decreased over the years, Beck said. “(A repeal of 1031) would represent another barrier for the next generation of producers who hope to take over a farm. 1031 is a motivator to transfer land. It reduces the cost of capital for land acquisition. It’s tremendously difficult to plan when things keep changing. There’s absolutely no way to craft an effective estate plan when the goalposts are constantly moving.”
Interested farmers and ranchers may submit a comment regarding tax policy to their legislators via the NCBA at policy.ncba.org.
A letter signed by 41 national and regional agriculture organizations was sent to House and Senate leaders in May by the Tax Aggie Coalition. The letter notes there are four times as many farmers and ranchers aged 65 and older as there are those under 35, and those individuals own more than 40 percent of U.S. agricultural land. Over the next two decades, more than 370 million acres of farmland is expected to change hands. “The policies Congress enacts now will determine agricultural producers’ ability to secure affordable land to start or expand their operations,” the letter said. “Regardless of whether a business has already been passed down through multiple generations or is just starting out, the key to their longevity is a continued ability to transition when a family member or business partner dies. Retaining like kind exchanges, which allows businesses to buy and sell like assets without tax consequences, also helps farmers and ranchers cash flow and to reinvest in their businesses.”