For years, farmers have used the tax strategy of Section 1031 Tax-Deferred Exchanges (also known as like-kind exchanges). It can be a great option to defer the gain on the sale of farmland.
However, 1031 exchanges have a few key restrictions. “One is a farmer has to reinvest all of the net sales proceeds including any debt that is paid off,” says Paul Neiffer, a CPA and principal at CliftonLarsonAllen and author of the blog “The Farm CPA.” In today’s low-income farm environment, many farmers would like to sell land to pay down debt but also want to defer paying capital gains taxes.”
The Tax Cuts and Jobs Act added a new provision that can help with this issue. Farmers can reinvest the gain into an opportunity zone fund and continue to defer the capital gains tax, Neiffer says.
“Also, the amount of capital gain goes down by 10% if the fund is held for at least five years and a further 5% reduction if held for at least seven years,” he says. “However, all of the remaining defer tax is owed as of Dec. 31, 2026, so 2019 is the last chance to get a full 15% reduction in capital gains taxes.”
Another big benefit of an opportunity zone fund is all the appreciation in the fund is completely tax free, if it is held for at least 10 years.
Neiffer provides this example:
Susan sells land for $2 million that has a $500,000 capital gain. She pays off $1 million of debt at closing, leaving $1 million of cash. She invests $500,000 into an opportunity zone as of Dec. 1, 2019. She invests the remaining $500,000 as working capital in her farm.
She holds the fund for 11 years and sells it for $1 million. Since she has held the fund for at least seven years as of Dec. 31, 2026, she only owes capital gains taxes on $425,000 ($500,000 times 85%) and when she cashes in the investment for $1 million, she owes no tax on the $500,000 investment gain.
“Another feature some farmers may qualify for is if they live in an ‘opportunity zone area,’” Neiffer says. “In my state of Washington, all of Columbia and Garfield counties are opportunity zones and there are lots of farms in these counties. The farmer can set up their own opportunity zone business and qualify for the same tax treatment on any capital gains they can roll over.”
Neiffer reminds that you can only roll over capital gains. Most gains from the sale of farm equipment and Section 1245 real property gain will not qualify for the investment. Note, your state may continue to tax these gains.
Learn more about opportunity zones.