Selling a farm or a ranch, like selling any business, often involves many different types of assets. The transaction may include equipment, livestock, water rights, crops, inventory, and, of course, real estate. Investors interested in selling a farm or ranch using a like-kind exchange under Internal Revenue Code §1031 should focus on the particular property being sold and purchased in order to maximize various tax tools, including the amount of capital gain that they will be able to defer. First American Exchange experts are here to help you navigate your 1031 Exchange.

What is a 1031 Exchange?

When you sell an investment property and buy another, you may face a large capital gain and the prospect of paying federal taxes on it- and, in some states, state taxes as well. So, your attorney, tax advisor, or real estate professional may suggest a tax-deferred exchange under Section 1031 of the Internal Revenue Code. A 1031 Exchange allows you to dispose of investment properties and acquire “like-kind” properties while deferring capital gains taxes.


Let’s assume you purchased a property for $250,000 five years ago. It has a current mortgage balance of $200,000 and has appreciated to a FMV of $350,000. During the period you owned the property, you have taken depreciation deductions of $45,000. Assuming your income for the year is over $400,000, your long-term federal capital gains tax would total $36,760, calculated as follows:

$100,000 appreciation gain x 20% = $20,000; plus

$45,000 depreciation recapture x 25% = $11,250; plus

$145,000 gain x 3.8% Medicare tax rate = $5,510.