Pro’s and con’s of selling without doing a 1031

[Butch973]

So we have an under utilized farm that we’d like to 1031 into something else closer to home eventually. The more I got the thinking though, the interest alone we pay on these other farm mortgages yearly would heavily outweigh any capital gains we’d have to pay if we don’t find a replacement piece. I know everybody likes to talk about write offs and this and that but for me not having to try and scrape a huge payment together every year to pay those mortgages I’d much rather sell that other farm pay the gains and pay off these other farm loans and not have to worry about that anymore. Anyone experience something like this or have a similar predicament? Or is there more to it than just the 20% or whatever the gains rate would be? I guess then that would be on my individual tax return as well or is that a one time deal?

 

[CottonwoodCanyon]

Someone smarter than me can chime in if I'm wrong but I'm pretty sure it's just the % cut to Uncle Sam. If it makes more sense for you to cash out that farm and pay down others, I guess go for it!

 

[IowaBowHunter1983]

.... get creative on your cost basis. Every penny you ever put into the farm should go against your basis. Evaluate what that looks like....

 

[deerdown]

It's the capital gains rate + the Obamacare tax of 3.8% above certain income levels I believe. So, can be up to 23.8% if I remember correctly... Do some research on it....

 

[Muskrat24]

.... get creative on your cost basis. Every penny you ever put into the farm should go against your basis. Evaluate what that looks like....

As long as those expenses/improvements were not already expensed.

 

[Butch973]

Yeah definitely need to run some numbers. What we pay in capital gains on this piece would equal 2 yrs of interest on the loans on the other farms. I’ll talk to the accountant when I do my taxes next month. Crazy how much we pay back to the government and we’re still trillions in debt and counting!

 

[CottonwoodCanyon]

Yeah definitely need to run some numbers. What we pay in capital gains on this piece would equal 2 yrs of interest on the loans on the other farms. I’ll talk to the accountant when I do my taxes next month. Crazy how much we pay back to the government and we’re still trillions in debt and counting!

Isn't that the truth...that's why it's best to avoid giving them as much as legally possible! If there's a system, play it. Your accountant will be able to point you in the right direction hopefully.

 

[Butch973]

Isn't that the truth...that's why it's best to avoid giving them as much as legally possible! If there's a system, play it. Your accountant will be able to point you in the right direction hopefully.

But isn’t a 1031 just basically kicking the can down the road? When it’s time to sell and we get to the end of that road we’re gonna have to pay uncle Sam anyway no?

 

[Daver]

Yeah definitely need to run some numbers. What we pay in capital gains on this piece would equal 2 yrs of interest on the loans on the other farms. I’ll talk to the accountant when I do my taxes next month. Crazy how much we pay back to the government and we’re still trillions in debt and counting!

You aren't wrong. ^^ One could get the impression that those of us that work and pay taxes are somehow funding many who do not. Weird.

 

[JBAGS]

But isn’t a 1031 just basically kicking the can down the road? When it’s time to sell and we get to the end of that road we’re gonna have to pay uncle Sam anyway no?

If you sell, yes it will eventually catch up to you. But it you keep it, or put in a trust, die, kids get it or whatever, you are still good. Someone correct me if im wrong

 

[Thinkin Rut]

the interest alone we pay on these other farm mortgages yearly would heavily outweigh any capital gains we’d have to pay

Sounds like you are getting choked out in interest rates and you already know the solution. On the other hand, if you buy another farm close to home with a high interest rate, you'll be sitting in the same boat minus the 1031 tax savings.

 

[Butch973]

If you sell, yes it will eventually catch up to you. But it you keep it, or put in a trust, die, kids get it or whatever, you are still good. Someone correct me if im wrong

Ha the goal was always to cash out when I retire and move to Costa Rica! Sailfish and señoritas!!

 

[JBAGS]

Ha the goal was always to cash out when I retire and move to Costa Rica! Sailfish and señoritas!!

Hah, good plan for sure! Then you are getting taxed unfortunately. Maybe by the time you do that gains tax will go down. Not likely but could happen.
Missouri just dropped the gains tax so you would only pay federal if it was in MO

 

[Hardwood11]

But isn’t a 1031 just basically kicking the can down the road? When it’s time to sell and we get to the end of that road we’re gonna have to pay uncle Sam anyway no?

If you pass away, it goes to the heirs without the tax . That’s my plan .

 

[Hardwood11]

If you sell, yes it will eventually catch up to you. But it you keep it, or put in a trust, die, kids get it or whatever, you are still good. Someone correct me if im wrong

I believe that is correct. We have trusts set up for the boys to inherit .

 

[tall@wide]

1031s have always been a no-brainer for me. If you have just a small profit when you sell, I could see paying the capital gains tax. But most have people have big gains on the sale. 100s of thousands profit on a sale is not uncommon.

 

[CottonwoodCanyon]

But isn’t a 1031 just basically kicking the can down the road? When it’s time to sell and we get to the end of that road we’re gonna have to pay uncle Sam anyway no?

If you cash out on Costa Rica and senoritas then yes (which sounds like a great plan honestly...) but if you use trusts correctly then no. Step up basis upon death and such.

 

[hans1]

The other part is the amount of debt you have on the property. To avoid taxes in a 1031 you would need to spend at least the amount of the sold farm. This is often difficult to find an exact dollar for dollar replacement. This leads to creating more debt.
The only other strategy to consider is a Delaware Statutory Trust “DST” . A DST is like owning a small share of an income producing asset like an apartment building. They are managed to produce a profit and returns for the fractional owners. After a period of time the asset is sold and you can get your money back. I have never done this but have friends that deal with these.

 

[Brett Morris]

Not sure I understand why you wouldn't ALWAYS want to delay taxes. Capital gain rates are historically low so that's maybe the one reason but most landowners are never going to exit their land positions so you're banking on your heirs getting a stepped-up cost basis upon your death anyway.

 

[JBAGS]

Not sure I understand why you wouldn't ALWAYS want to delay taxes. Capital gain rates are historically low so that's maybe the one reason but most landowners are never going to exit their land positions so you're banking on your heirs getting a stepped-up cost basis upon your death anyway.

I am in the same boat, I have only NOT done a 1031 on 1 sale, and it was so painful paying the tax bill I don't see me doing that again unless I am forced to.