It can be difficult to avoid taxes on the sale of land altogether, but there are options for minimizing tax exposure now, deferring tax liability until later, and planning for the future.
Recently we worked with a farmer and landowner who was presented with what you might call a once-in-a-lifetime opportunity to sell farm ground. We gave the family options for how to handle the sale, including a 1031 exchange. In a 1031 exchange, the land is sold and no taxes are paid provided the land is converted into another real estate asset.
There are several alternatives to a 1031 exchange, including a deferred sales trust or a structured sale that can result in tax deferral. The family opted for a different approach than a 1031 exchange because they did not want to convert the proceeds from the sale of the land into another land asset.
The sale resulted in taxable income in the millions of dollars, so we gave the family several options for managing the tax exposure. In this case, we gave the family specific scenarios and settled on pre-paying expenses like seed, fertilizer, chemicals and water. These prepaid expenses acted as a buffer against a portion of the proceeds from the sale of the land.
As a result, the family was able to defer a portion of the tax exposure and begin planning for successive years.
There is no one-size-fits-all solution to land sales. Consult your accountant or reach out to me at jeff.tatsumura@kcoe.com to learn more.