A little over a month ago, I wrote a blog about Section 12504 of the Farm Bill that was under consideration by the Senate at the time. (You can read it here.) The focus of the blog was the general impact on Section 1031 that a particular subsection of the bill might have. The gist of the whole thing was that the proposal sought to redefine the concept of "like-kind" property, which until now has had a very broad definition when it comes to real estate. (You can exchange raw land for an apartment building, three rental houses for an industrial building, an office complex for a farm, etc.) The provision within the Farm Bill would make it so any land that has been receiving government subsidies (which includes the farms of nearly all family grain farmers) would no longer be considered like-kind to other real estate held for investment or used in the pursuit of a business or trade. The supposed purpose behind this provision is to help keep land prices down because so much land is being purchased through 1031 exchange proceeds, although I don't know how true that is. The other factor involved might be an intention to reduce the amount of ground under subsidy programs (because a farmer can opt out of the subsidy program and have his land then qualify for an exchange). The problem, as mentioned in my first blog, is that the entire concept does little beyond punishing the family farmer for accepting a subsidy that was virtually forced on him in the first place. Now the farmer with no actual heirs, or none willing to take on the burden of the farm, who has worked his entire life in agriculture, all of a sudden has his primary means of the disposition of his land (a Section 1031 exchange) taken away from him. So much for helping the family farmer...
THE NEW INFORMATION
I am unhappy to report that the Farm Bill that has now passed out of the Senate has done so with the provisions regarding Section 1031 pretty much intact. The bill now goes to the House of Representatives, where reason may prevail. Beyond that, should it get through that body, the President has promised a veto of the bill, so we can hang our hats on that for the time being. But once again relating to my first blog on the subject, the crux of the matter is that Congress is now considering Section 1031 of the Internal Revenue Code as low-hanging fruit as to the possibility of raising additional tax dollars. In other words, if they can change the definitions contained within Section 1031 through the Farm Bill, what's to stop them changing other aspects of the exchange process to further restrict our alternatives?
ACTUAL LANGUAGE FROM THE BILL:
For those of you who enjoy this sort of thing, here is the language from the bill itself:
Section SEC. 504. MODIFICATION OF SECTION 1031 TREATMENT FOR CERTAIN REAL ESTATE.
(1) IN GENERAL - Unimproved agricultural real property and improved real property are not property of a like kind.
(2) UNIMPROVED AGRICULTURAL REAL PROPERTY - For purposes of this subsection, the term unimproved agricultural real property means real property -
(A) which is unimproved;
(B) which is used for farming purposes (within the meaning of section 2032A(e)(5)); and
(C) with respect to which a taxpayer receives, in the taxable year in which an exchange of such property is made, any agriculture program payments or Com-modity Credit Corporation loans.
(3) EXCEPTION- Paragraph (1) shall not apply with respect to any unimproved agricultural real property which, not later than the date of the exchange, is permanently retired from any program under which any payment, loan, or benefit described in paragraph (2)(C) is made.
If you are so motivated, contact your representatives to let them know how you feel about what I consider to be an attack not only on farmers, but on the very essence of Section 1031 of our tax code.
Ken Tharp
Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.
INTEGRITY. PRECISION. SECURITY.
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