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Swapping land advantageous for the whole

Farm & Family: 1031 allows tax benefits for family members to own parcels of land.

Mark Balzarini

June 7, 2024

2 Min Read
cornfield being harvested
KEEP IT TOGETHER: When a family’s farmland passes from one generation to the next, differing views may present roadblocks in keeping it together. Families have options, such as a 1031 land swap, to satisfy all parties involved. Kevin Schulz

I often meet with families where farmland was distributed from parents to children equally as tenants in common. This means each of the children owns all the land together. They often make a statement, such as, “There are 500 acres and five children, so each child is receiving 100 acres,” but this is not exactly correct; actually, each child receives an interest in all 500 acres with their four siblings.

This situation can work well if the siblings are able to agree on how to manage and use the land, or if there are rules within the trust or will that give them the land that state how the land is to be managed and used. But eventually this arrangement for land ownership may not work. This may happen because some children want to sell the real estate and others do not; or when a child dies, and their share is distributed to a spouse or the next generation.

In these cases, we may advise that the family make a land swap between the owners. To do this, the family members would need to agree on how to divide the land and determine separate parcels for each of the owners. Often, they will need to use surveyors and appraisers to assist in breaking up and valuing the parcels.

After the parties have agreed on the surveyed parcels and the value of those parcels, they can enter into a real estate swap agreement. The goal with the swap agreement is for each party to own parcels of land individually. This is done under Section 1031 of the Internal Revenue Code without recognizing capital gain. Their share of basis in the whole of the real estate will swap to the parcel they each receive. In the event the values of the parcels are not equal and there is a cash transfer between the parties, there will be a partial recognition of capital gain and a partial adjustment in basis.

When completing a 1031 exchange between related parties, the parties generally must hold the real estate for two years following the exchange. The exceptions to this rule are: 1) if a party dies; 2) if the property is involuntarily converted; or 3) if it is shown that the transfer was not done to avoid taxes. This last exception is decided on a case-by-case basis; there are cases where it has been used when parties swap undivided interests so each owns a whole parcel.

Balzarini is an attorney at law with Hellmuth & Johnson PLLC. Contact him at [email protected].

About the Author(s)

Mark Balzarini

Mark Balzarini is an attorney at law with Hellmuth & Johnson PLLC. Contact him at [email protected].

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