In one sense, it’s sad that the federal tax code is so verbose and complex that it requires a Ph.D. in tax knowledge to understand how to navigate it. Enter an entire industry and profession: certified public accountants, tax attorneys and other tax advisers.
I always tell people before pointing to any tax strategy that I’m just a dumb auctioneer, and they should consult with the professionals before believing everything I say.
I’ve also heard someone fairly wise with tax strategy say, “I’m not a tax expert, but I pay a lot of taxes, and here’s what I do.”
I think that qualifies us to have an opinion of sorts without fear of being sued for giving tax advice. So, that’s my disclaimer. In summary, to cover my butt, talk to your high-dollar experts.
With that said, I thought it would be useful to write about some of the tax strategies I see buyers and sellers employ after buying or selling land through our auctions across the U.S.
If you can use the tools the IRS provides to legally pay the government less, I think it makes good business sense to understand those options. They include:
1031 and 1033 exchanges. These are probably some of the greatest tools available from a tax strategy perspective. The basic principle is pretty simple: If you own land, hopefully it’s worth more than you paid for it. The difference between what you paid and what you end up selling it for can create a taxable gain.
A 1031 exchange allows you to take the equity from the sale of one property and put it to work in a new one while deferring the gain. The reverse of that is called a reverse exchange, which allows you to buy the replacement property first and sell the property you’re giving up later.
Timelines are important here, and much is written about this online and on our website under the service “1031 Exchange.”
A 1033 exchange is similar in that it can allow you to defer a taxable gain, but it applies to property that is involuntarily acquired or taken, such as through eminent domain. Think highway or diversion projects. “Hey, we’re buying your land for this highway or ‘greater good’ project.”
The replacement rules and timelines are much more generous from a 1031 exchange, so talk to your tax professional if you find yourself in that situation.
Section 180 soil fertility deduction. There’s another strategy that gets talked about quite a bit when buying land: the legacy soil nutrient deduction. The basic idea is that a soil test can identify nutrients left in the soil from previous years and estimate their value.
Some tax professionals use that information to support a deduction for those nutrients, including for certain buyers who rent out their land rather than farm it themselves. The same strategy is often associated with Sections 167 and 168.
Up until a decade or so ago, this wasn’t employed very frequently. Some of my CPA friends were even unsure how well it would hold up under an IRS audit. There are now companies that specialize in these studies, and some tax professionals regularly use this strategy.
One downside to keep in mind is that the deduction lowers your basis in the land. For example, if you take a $4,000-per-acre deduction on a $10,000-per-acre farm, your remaining basis is now $6,000 per acre. For many land buyers, the plan is to keep the land forever — or until time of death, at which point the “stepped-up basis” often applies.
Cost segregation: Drain tile and other improvements. If you buy land that is tiled, get the tile appraised, and ask your tax preparer whether you can allocate part of your purchase price to the tile and depreciate it. I have seen this strategy employed by our buyers. Many tile companies can help with this for a fairly nominal fee, especially if they installed the tile or have access to tile maps.
If you buy land and put tile on that farm, the cost also may be depreciated under the applicable tax rules. The same general idea can apply to new and existing irrigation systems, buildings, wells and other improvements used in production agriculture. Marketable timber also can have tax benefits worth looking into.
The important thing is to have the value properly supported and understand that depreciation rules vary depending on the asset. An appraisal doesn’t automatically mean the entire value can be deducted right away, so make sure your tax preparer is involved.
Section 1062: Selling to a qualified farmer. The One Big Beautiful Bill Act added another tool for land sellers to look at. Section 1062 allows eligible sellers to spread the tax on the gain from a qualifying farmland sale over four years when selling to a farmer who is actively engaged in farming.
There are some strings attached, including a 10-year restriction requiring the land to stay in agricultural use. That could be a good fit for some sellers, especially when selling to a longtime tenant, but in an auction setting, you also have to consider whether that restriction could turn away buyers and reduce competition. As with any tax strategy, visit with your CPA to see if it makes sense for your situation.
I’m sure there are others I’ve missed, but these are just a few of the main strategies I’ve seen buyers and sellers employ on our land auctions. When you’re buying or selling farmland, it pays to ask questions before the transaction is complete. A conversation with your CPA or tax adviser could save you some money and help you make a more informed decision.
And remember, I’m just a dumb auctioneer. Talk to the true experts.