Using 1031 Real Estate Exchanges to Defer Taxes
Iowa Farmland as an Investment
Real estate has two components when considering its return potential - cash operating returns and future changes in value. Various types of land will have differing relationships between these two components. Land with development potential may have very low or even negative cash returns but may have greater appreciation potential when development arrives. Highly improved properties may have high cash returns, but may depreciate in value over time.

Iowa farmland typically experiences returns that are relatively similar on both sides of the scale, with cash operating returns usually slightly higher than annual appreciation in value. Investment analysts who study various investments for long-term annual performance rate farmland as Number 2, just behind the stock market, but with less volatility than stocks.

Cash returns will depend on land quality, lease type, location, and other factors. However, annual cash operating returns of 4 to 7% of current value can be expected, but could range from as low as 2% to as high as 10% in a given year. As land value appreciates, operating returns should maintain in that range, although appreciation and returns will not change identically from year to year. Therefore, as a long-term investment, cash operating returns should keep up with inflation as the asset appreciates in value.

Historical change in land value can be easily tracked with the well-known Iowa State Land Value Survey, which is published as of each November 1st. Timing is critical to achieving an above-average appreciation rate; however, long-term analysis shows that Iowa farmland has increased in value by 3 to 5% annually. There have been 22 years in the past century when land values decreased and 78 years when values increased or held steady. Beginning in 1900 at $48 per acre and ending in 2000 with an average value of $1,857 per acre, Iowa farmland averaged an increase of 3.72% per year. Periods of major land value changes included price spikes during WWI to 1920, and during the inflation-fueled 1970s. Major declines in land values occurred from 1921 to 1933, and from 1981 to 1986.

Considering the historical performance of rising land values and relatively consistent cash returns, Iowa farmland is an excellent place to build and store wealth.
If you are considering selling real estate that will produce a taxable gain, you should consult your tax advisor about IRS regulation 1031. This section allows taxpayers to exchange properties of equal or lesser value to defer the tax liability.
Below is general information on terminology and procedures involved in qualified exchanges:

Eligible Properties - have to be of like kind, which means income producing real estate owned by individuals. For example, an apartment house could be traded for a farm or a commercial building.

Initial Offers - to purchase must contain language stating that the seller intends to use section 1031.

There are two methods of executing an exchange:
Older Method - involves actually trading deeds for the different properties at a common closing. However, these transactions are hard to effect, requiring coordination and closing several real estate transactions simultaneously.
Newer, Easier Method - uses the services of a qualified intermediary as an escrow agent to "park" money from the sale of the first property while identifying and arranging the purchase of the replacement property.
The following items concern the use of the qualified intermediary agent concept:
Real Estate - agencies, attorneys, banks, and individuals can all serve as qualified intermediaries if proper agreements are executed. Typical charges for this service are usually $1,000 or less. The escrow account where the money is deposited can earn interest. If a bank is selected as the intermediary, the bank should not be involved in financing either of the properties.
The Qualified Intermediary - will actually buy the next property with money from the escrow account at the principal's direction. The funds cannot become available to the principal, or 1031 rules are violated and the gain on the sale will become taxable.
From the Date - of closing the sale on the first property, the seller has 45 days to identify potential replacement properties. It is imperative that the identified properties be available for purchase and that the replacement property is selected from those identified.
The Seller has - 180 days to close on the replacement property from the date of closing the sale of the original property.
We can help you complete real estate exchange transactions which reduce or eliminate tax liability. Call us if you want to discuss the advantages of the process.