Senate Bill 2242, the Heartland, Habitat, Harvest and Horti-culture Act of 2007 is threatening to restrict the ability of farmers to do 1031 exchanges out of their farms upon retirement. As the tax code now reads, an agricultural / raw piece of land can be exchanged out of into any other kind of real estate and be considered “like-kind” (see an earlier post to understand what “like-kind” means). Thus, Frank the Farmer can sell his farmland upon retirement and buy other money-producing property tax deferred.
Well, the language of section 504 of the proposed statute is as follows:
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.
Essentially, this seems to say any agricultural land which farmers have banked on being able to exchange out of will no longer be allowed. As such, all of your commercial farmers will be heavily taxed upon retirement. I can only imagine what far-reaching implications this will have if it goes through. Montana’s Prairie Star makes the great point that if this goes through, just how long will it take until the common rental property owner won’t be able to exchange anymore.