LAND EXCHANGE PROVISION COULD HURT RETIRING FARMERS

NEW ORLEANS, January 14, 2008—A Senate farm bill provision would chip away at what has proved “an exceptionally farmer-friendly tax provision” while attempting to “eliminate subsidies through a tax proposal,” a pair of ag land exchange specialists warned during the American Farm Bureau Federation’s 89^th annual convention.

The Senate’s 2007 farm bill proposal includes a provision prohibiting federal Section 1031 exchanges of non-agricultural real estate and farmland enrolled in farm subsidy programs, unless the farmland is permanently retired from key program payments. The provision would apply to farmland either sold or purchased under an exchange.

David Brown, Iowa-based vice president of the national Federation of Exchange Accommodators (FEA), warned the proposal—up for House-Senate conference approval—would seriously reduce the market value of affected ag land and “take options away from the retiring farmer” eyeing alternative investment possibilities.

Section 1031 tax-deferred exchanges allow a property owner to sell a property and buy another of “like kind” without having to pay capital gains taxes until the replacement property is sold. Currently, all real estate is considered like kind property, and thus a producer can sell farmland to reinvest in an improved non-agricultural property, such as an office or apartment building.

FEA board member and Montana attorney Max Hansen fears the potential consequences of the Senate provision could lead to lawmakers targeting livestock, ag equipment, or other “farmer-friendly” 1031 exchanges to generate higher tax revenues. Under congressional “pay-go” directives, new program spending or tax cuts must be offset with corresponding program or tax cuts.

“When you start tinkering with one aspect of 1031—a taxpayer-friendly provision in the Tax Code that’s been there since 1921—the next time somebody has a pet project where they want to raise more revenue to do something, in a revenue-poor system with this tremendous (federal) debt we have to deal with, what other provision of the code are they going to eliminate?”

Section 1031 was added to the federal Tax Code in 1921, according to Hansen, in an effort to stimulate economic activity. Because of its capital gains benefits, the provision has been referred to as “an interest-free loan from Uncle Sam.”

Beyond offering “less labor-intensive” income-earning opportunities for retiring producers, Brown noted farmers use 1031 exchanges to combine, expand or move operations; exchange tractors, livestock, grain bins and other equipment under strictly regulated circumstances; and consolidate currently separated tracts. He estimated 95 percent to 98 percent of his nationwide 1031 dealings involve farmland-to-farmland exchanges, especially with the residential real estate market in decline.