If You're Planning to Sell Your Ranch or Farm, the Sooner You Begin to Consider the Tax Consequences, the Better
"When you sell your property through a charitable remainder trust you are essentially giving away the Golden Goose but reserving the right to the Golden Eggs it lays for the rest of your life." - Chris Nolt
For self-sufficient ranchers and farmers, it’s often difficult to accept that when it comes to selling their properties, they require outside help.
The tax and investment-planning aspects of a rural property sale are so complex that even the best experts in the real estate profession readily acknowledge that optimizing the sale requires a team of specialists.
Chris Nolt, the author of Financial Strategies for Selling a Farm or Ranch, provides an excellent overview of the issues involved in completing the successful sale of a ranch or farm, and of the tax traps that many unprepared property sellers fall into.
I recently had the pleasure, along with my colleague Jay Whidbee, of interviewing Nolt for my podcast, RANCHCAST.
Nolt, who grew up in Montana and worked on large cattle ranches during his summers, is president of Solid Rock Wealth Management and Solid Rock Realty Advisors. These sister companies serve agricultural families by providing high-quality financial planning, especially when it comes to the efficient sale of their ranch or farm; and developing an optimal retirement strategy.
High-Stakes Property Sales
After a lifetime of hard work – sometimes over generations – when the time comes to sell their ranch or farm, many families don’t realize how high the stakes can be. Failure to plan ahead, or improper planning, can cost families much of the potential value vested in their properties.
For many rural families, their properties are far and away their single biggest asset.
“These families have worked very hard for their money and when they sell they need to make their money work for them,” Nolt tells me and Jay.
Two of Nolt’s favorite vehicles for legally and efficiently minimizing capital gains taxes on the sale of agricultural properties are the 1031 Tax-Deferred Exchange and the Charitable Remainder Trust.
Many of my clients at The Ranchbroker have availed themselves of these tax-savings strategies.
Both 1031 Tax-Deferred Exchanges and Charitable Remainder Trusts have elaborate rules that govern them, yet when planned and executed properly — often incorporated with other tax-savings strategies — they can greatly reduce, and sometimes even eliminate, the tax liabilities that are normally associated with the sales of an appreciated property.
1031 Tax-Deferred Exchange
An elementary way to describe a 1031 Tax-Deferred Exchange, as Nolt details in his book, is that it allows a family selling a ranch or farm to reinvest the proceeds from the sale in other real estate, and thereby to defer capital gains.
Nolt explains that the benefits of 1031 Exchanges include:
There are several types of 1031 Exchanges that are allowed — including so-called delayed, simultaneous, reverse, and build-to-suit exchanges. And, of course, there are basic rules that must be met for an Exchange to qualify, including restrictions on the type of properties that may be used.
“A 1031 Exchange does not avoid tax, it only defers it,” Nolt writes in his book. “However, by holding exchanged property until death, one’s heirs may inherit (the exchanged) property with a ‘stepped up’ basis upon death, conceivably allowing them to sell property and avoid capital gain taxes altogether.”
[Note: The most recent tax reform measures passed by Congress and signed into law preserved the 1031 Exchange for real property, but personal property is no longer eligible.]
One of Nolt’s favorite forms of a 1031 Exchange is to trade a ranch or farm for ownership of an office building that is leased to a government agency, such as the Social Security Administration, Homeland Security, or the Forest Service.
As tenants, the U.S. government has the highest possible credit rating, and the office buildings themselves can be managed by an experienced third-party company. As such, the rural property sellers wind up with significant tax savings, no-hassle stable income, and a secure investment.
A Charitable Remainder Trust
A Charitable Remainder Trust (CRT), in basic terms, allows ranchers or farmers to convert their appreciated land into a lifetime income stream without incurring income taxes on the sale.
When you sell your rural property through a CRT, Nolt writes, “You are essentially giving away the Golden Goose but reserving the right to the Golden Eggs it lays for the rest of your lives.”
The way a CRT works is that the landowner transfers his or her assets, including land, livestock, crops, machinery, and equipment, to a newly established trust. The trustee of the CRT then sells all the assets. Because the original landowner no longer owns the land and other assets, there are no taxes due upon the sale.
The proceeds of the sale are then invested, creating a lifetime stream of income for the original donors. After the original donors die, the remaining assets belong to and benefit the designated charity.
A CRT, Nolt explains, “makes the most sense for people who are selling highly appreciated assets and who also have a desire to give to charitable causes.”
So that the donors’ children can still benefit from the value accumulated in their properties, one strategy used by those who elect a CRT is to purchase life insurance and set it up in an irrevocable life insurance trust. In that way, the children of landowners eventually will receive the life insurance proceeds income and estate tax-free.
Where to Begin
On RANCHCAST, Nolt advises that the first step for property owners who are thinking about a sale of their ranch or farm is to work with a qualified property broker. “A good ranch broker is imperative,” Nolt says.
The right broker will know the market well enough to provide an accurate estimate of the value of the land and associated assets. That, in turn, will allow a tax advisor to project what the sellers’ normal tax liability would be if they fail to take the type of protective steps that Nolt outlines in his book, such as a 1031 Exchange or CRT. (Occasionally, no tax-saving strategies will be necessary, but those instances are exceptions, not the rule.)
While 1031 Exchanges and CRTs allow property owners with appreciated land and assets to avoid or defray a sizable tax bite, it still falls to the property owner — with the aid of an expert property broker — to find a buyer, or buyers, for the property. If the broker undervalues the property, or the land and assets sit unsold for an extended period of time, the advantages of any potential tax savings stand to be offset by the failure to execute a timely and optimally priced sale.