You could easily end up paying 20% or more of the value of your property in taxes when selling your ranch. Fortunately, financial tools exist that allow people selling ranch property to avoid paying taxes on the sale. Here is an overview of these financial tools.
The IRC Section 1031 Exchange can be a powerful tax saving and wealth building tool that allows a taxpayer to sell property and purchase other property without currently recognizing capital gains tax on the sale. To quote the tax code: “No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment purposes if such property is exchanged solely for property of a like-kind, which is to be held for either productive use in trade or business. The definition of “like-kind” is very broad. Land, for example, can be exchanged for other types of real estate such as office buildings, apartment complexes, etc.
A charitable remainder trust (CRT) is another tool to defer or avoid capital gains tax on the sale of appreciated real estate. In addition to avoiding tax on the sale of real estate, a CRT can be used to avoid tax on the sale of other ranch assets such as livestock, machinery and equipment.
IRC Section 121 allows an individual to exclude up to $250,000 of taxable gain from the sale of a principal residence and a married couple filing a joint return to exclude up to $500,000 of gain. It might be possible to allocate additional acreage with a personal residence to maximize this tax saving opportunity.
You’ve worked hard to create the equity in your ranch. When it comes time to sell, you need to work smart to preserve that equity. In today’s complex financial world, you need a plan that takes into account tax, retirement, estate and investment planning. No single person has the expertise to effectively address each of these areas. This is why you need to work with a team of advisers.
Besides the real estate agent you work with to sell your property, the planning process might involve the services of a CPA, estate planning and real estate attorney, planned giving specialist, 1031 exchange intermediary, investment adviser and real estate appraiser. A team of advisers collaborating together on your behalf helps maximize the effectiveness of your plan by making sure every area is properly addressed.
Chris Nolt is the owner of Solid Rock Wealth Management, Inc. and Solid Rock Realty Advisors, LLC, sister companies dedicated to working with families around the country who are selling a farm or ranch and downsizing or transitioning into retirement. Contact him at: (800) 517-1031 or visit his website.