Do you own agricultural land, an orchard, or a farm? Consider yourself lucky because you have a goldmine. In the next few years, the demand for such type of land will increase.
These Will Sell Your Land
The land is one of the world’s most essential natural resources, yet it’s not an infinite supply. It explains why its value can increase significantly over time. But what makes it a valuable asset? There are many factors:
1. Food Security
Land equates to sufficient quality food for everyone. Food, meanwhile, is an indicator of health and wealth. It can even be a factor for peace. After all, when people are hungry, they can do everything to feed their needs.
Besides food, housing is another basic need. As the population increases, so does its demand. To cope with it, governments and real estate investors are willing and ready to buy more land. If it’s an agricultural lot, they can convert it into urban areas.
On the other end of the spectrum, you have people who desire sustainability. For this group, farmlands are ideal. They can grow their food, raise their livestock, and design a business around their produce.
Make the Most of the Sale
Selling land can be easy. Doing it without incurring more taxes is a different story.
The IRS levies taxes on various forms of revenues, such as wages and commissions. The same thing goes with profits from the sale of an asset such as your agricultural land.
One of the taxes is capital gains. As its name suggests, it is a percentage of the difference between the contract price and the profit. Depending on factors such as state rules, it can be as high as 30%.
To know its impact, here’s a simple illustration. Let’s pretend your farm sells for $800,000. Your initial purchase price is $300,000. That means you profit $500,000 from it. Your capital gains tax, therefore, can be around $150,000. Imagine the many things you can do with that amount.
You’ll never get away with such tax, but you can find a way to delay it for as long as you can. One of the valid options is 1031 land exchange.
Also known as Starker exchange or like-kind exchange, this arrangement has a simple concept: exchange your land for another commercial property with a similar value. Another way is to purchase a replacement property with a loan value and purchase price higher than the other asset. There are different ways to execute this, but the most popular is through a three-way exchange. In this setup, you will need an intermediary.
What happens is that you’re responsible for the nitty-gritty of a property sale from marketing to drafting the purchase agreement. But before completing it, you will relinquish the asset to the third-party, who will then initiate the transaction. They will also receive the sale proceeds on your behalf for 180 days. In the meantime, you can look for and buy a replacement property.
Many people like this arrangement since it gives them more time to avoid paying the hefty capital gains and choose a better-quality replacement property.
In the end, you might lose your farmland—or perhaps gain another one. It depends on the outcome of the sale. One thing is for sure: since the replacement is still a commercial or investment property, you can still make money. Even better, you can delay your tax liability until you have enough money to pay it.