1031 Exchange Strategies for Farm and Ranch Families Selling or Consolidating Land

Fences, grain bins and silos ride into the exchange; the recapture on them does not go away

The 2020 regulations settled a question farmers had asked for years. Reg. §1.1031(a)-3(a)(2)(ii) lists barns among buildings, and lists fences, roads, paved areas, special foundations, and grain storage bins and silos among other inherently permanent structures. All of them are real property for exchange purposes.

Paragraph (a)(7) of the same regulation then removes the comfort. Being real property here changes nothing about depreciation: farm improvements written off over seven or fifteen years stay section 1245 assets, and the regulation says a taxpayer transferring section 1245 relinquished property remains subject to the section 1245 gain rules.

§1245(b)(4) then measures how much of that ordinary income survives an exchange: it depends on what you recognize and on how much of what you buy is itself depreciable equipment-class property. Trade a farm carrying $200,000 of written-down bins for bare pasture and the Service can still bill the $200,000 at ordinary rates while the rest of the trade stays deferred.

Worked example: a $4,000,000 sale where $3,300,000 exchanges and $700,000 is settled this year

Take a hypothetical family operation sold in one transaction for $4,000,000 with round numbers. The contract allocates $3,000,000 to bare land, $300,000 to the barn, fences and bins, $400,000 to the farmhouse and its lot, $250,000 to machinery and $50,000 to stored grain.

The $3,300,000 of land and structures is like-kind property and can be exchanged, subject to the recapture point above on the bins. The farmhouse is handled under the home-sale exclusion, which for a married couple meeting the two-of-five-year test covers up to $500,000 of gain and easily absorbs this one.

The machinery and the grain are not real property and were never eligible after 2017. Fully depreciated machinery produces $250,000 of ordinary income under section 1245, and the stored grain is ordinary income as inventory. Run the allocation past your own CPA or attorney before signing; the split you write into the contract is the split you will defend.

• Exchangeable: $3,000,000 land plus $300,000 of barn, fences and bins.
• Home-sale exclusion: $400,000 farmhouse and curtilage, handled outside the exchange.
• Taxable now: $250,000 machinery as section 1245 ordinary income and $50,000 of grain as inventory.
• Raised breeding stock sold separately is section 1231 property if held 24 months for cattle and horses, 12 months otherwise.

Section 1062 is the newest option, and it is a payment plan rather than a deferral

§1062, added by Pub. L. 119-21 section 70437 on July 4, 2025, lets a seller elect to pay the net income tax attributable to a sale of qualified farmland property to a qualified farmer in four equal installments. The first is due on the unextended due date for the year of sale and each later one on the following year's due date.

The conditions are specific. The land must have been used by you as a farm, or leased to a qualified farmer for farming purposes, during substantially all of the ten years ending on the sale, and it must be subject to a covenant or other legally enforceable restriction barring non-farm use for ten years after the sale. A copy of that restriction goes with the return, and the buyer must be an individual actively engaged in farming.

It applies to sales in taxable years beginning after the enactment date, the election is made at the partner or shareholder level for partnerships and S corporations, and the balance accelerates on death or on a missed installment. Compared with an exchange it is narrower and shorter: you still pay the whole tax, just over four years, and you give up the land's future use in the bargain.

Standing crops go with the land; the grain in the bin does not

The regulation treats unsevered natural products of land, including growing crops, plants and timber, mines, wells and other natural deposits, as real property. It then says they cease to be real property when severed, extracted or removed, and its first example walks a fruit grower through the moment of harvest.

Separately, §1231(b)(4) treats an unharvested crop on business land held more than a year as property used in the trade or business, provided the crop and the land are sold at the same time and to the same person.

The practical rule for a sale contract is simple: keep the growing crop with the land in one transaction to the one buyer, and treat anything already in the bin, the pile or the truck as a separate taxable sale of inventory.

Irrigation company shares survived the 2017 repeal inside the regulations, not the statute

The 2017 law struck section 1031(i), which had protected shares in a mutual ditch, reservoir or irrigation company from being treated as excluded stock. Many western families assumed their water shares had lost like-kind status with it.

They did not. Reg. §1.1031(a)-3(a)(5)(i) lists those shares among the intangible assets that are real property for section 1031, on the same condition as before: the company must be described in section 501(c)(12)(A), and the shares must have been recognized as real property, or an interest in real property, by the highest court of the state of organization or by state statute.

The same paragraph makes fee ownership, co-ownership, leaseholds, options to acquire real property, easements and land development rights real property, while excluding partnership interests. That last exclusion is why a family entity's structure has to be settled long before a sale; 1031 exchange planning for family LLCs that own farms works through it.

Soil and water conservation deductions come back if you sell inside ten years

§1252 treats farm land as tainted by any deduction claimed under section 175 for terracing, drainage, water conservation or erosion work. On a disposition within ten years, the applicable percentage of those deductions becomes ordinary income, capped by the gain.

The schedule is 100 percent within five years of acquisition, then 80, 60, 40 and 20 percent in the sixth through ninth years, reaching zero at ten years. Subsection (b) applies rules similar to section 1245, which is how the exchange interacts with it.

For a family that has been improving recently bought ground, this is a real number and it argues for either waiting past the tenth year or budgeting the ordinary income into the deal. Ask the farm's accountant for the section 175 history before the auction is scheduled.

Leaving the operation without leaving the asset class

A retiring operator who exchanges into managed property trades crop risk and equipment for tenant risk and lease terms. The usual destinations are a net-leased building, a traditional DST or direct title security holding institutional property, or more farmland under a cash lease, and Reg. §1.1031(a)-1(c)(2) explicitly blesses trading city real estate for a ranch or farm and the reverse.

Where a buyer wants to pay over time, note that §453(l)(2)(A) keeps farm property out of the dealer-disposition bar, so installment treatment stays available on land used or produced in the business of farming even where it would be denied elsewhere.

We are a 1031 exchange broker, not your qualified intermediary and not the farm's accountant: twenty years and more at this work, a billion dollars and more of DST transactions placed, state licences everywhere in the country inside a regulated broker-dealer framework, and vetted national DST sponsors. The website form is the way to reach us.