Harvesting Wealth: Navigating 1031 Exchanges of Agricultural Real Estate

For investors interested in selling or acquiring agricultural property, understanding the intricacies of the 1031 exchange can be pivotal in maximizing investment opportunities. Investors in agricultural real property must be mindful of several unique considerations. Agricultural real estate (such as farms, ranches, vineyards, and orchards) is often comprised of many different types of assets. A sale transaction may include equipment, livestock, water rights, crops, inventory, and, of course, real estate. Additionally, agricultural properties vary significantly in terms of soil quality, climate suitability, water rights, and zoning regulations, which raises unique challenges for identification of suitable replacement properties. Additionally, the timing of certain activities, such as planting and harvesting seasons, can impact the exchange process, requiring careful planning to ensure a seamless transition without disrupting ongoing operations.


What Portion of the Sale is Actually Exchangeable?


An initial step for a seller thinking of exchanging a farm or other agricultural property is to itemize the various assets that comprise the property and determine which of those assets are exchangeable under section §1031.


Intangibles such as goodwill are not exchangeable under §1031, nor is inventory. Crops that have been “severed” from the land (i.e. harvested) are technically considered inventory. Additionally, the Tax Cuts and Jobs Act of 2017 eliminated the ability to exchange personal property assets under §1031 (equipment, livestock, etc.). Note, however, that the legislation did create a tool allowing for the immediate expensing of certain types of newly acquired business assets. Sellers of agricultural property should talk with their tax advisors about the immediate expensing rules to see if any new equipment acquisitions can help them benefit from this tool.


The largest asset for most agricultural property sales is the real estate itself. Real estate used in a trade or business or held for investment can be exchanged for like kind real estate under Internal Revenue Code §1031. Crops and timber that are growing on the land are considered part of the real estate.


Exchanging Real Property Assets


Real Estate and Buildings: The real estate assets of an agricultural property, such as a ranch or farm, include the land and any improvements attached to the land such as a house, barn, or storage/processing facility. If a residence on the farm is occupied by a tenant, worker, or caretaker of the property, it is considered investment property or property used in a trade or business and is exchangeable under §1031. On the other hand, if the owner of the property lives in the house, the house is considered the owner’s personal residence and would not be exchangeable.


There are various tax strategies when selling property that is used both as a personal residence and as investment property. If property is held partially for personal use and partially for investment, such as a working ranch with a house on it where the owner lives, the owner should determine what percentage of the property comprises the investment portion, and what percentage of the use is personal. Some of the gain from the sale of the personal residence can potentially be excluded from taxation under IRC §121 (the primary residence exclusion). The capital gains for the investment portion of the property can be deferred using a §1031 exchange. Revenue Procedure 2005-14 clarifies how Sections 121 and 1031 can be used at the same time in connection with the disposition of the same property. More information on the intersection of Sections 121 and 1031 can be found here.


Crops: Harvested crops are considered inventory and are not exchangeable under §1031. It is possible to exchange unharvested crops when they are sold with the land (i.e. still growing), at the same time and to the same person. The unharvested crops must also be considered real estate under the law of the state the property is located in.


Water Rights / Mineral Rights:  Often agricultural properties will have the benefit of running water or some other water source. At times, along with this feature come certain water (or “riparian”) rights. The IRS has held that perpetual water rights are like kind to a fee interest in real estate. The rights must not be limited in amount or duration. Additionally, shares in a mutual ditch, reservoir, or irrigation company can be exchanged if at the time of the exchange certain requirements are met including (1) the company is an organization described in I.R.C. § 501(c)(12)(A), and (2) the shares in such company have been recognized as constituting an interest in real property. Certain types of mineral rights that are considered real estate may also be exchanged. Owners need to examine the nature and duration of the rights granted and whether they are considered to be real estate for tax purposes.


Like Kind Requirement


IRC §1031 allows for the deferral of capital gain tax if property held for business or investment is exchanged solely for property of "like-kind". Contrary to what many people believe, "like-kind" does not mean that an investor must exchange a farm for a farm. In the context of real estate, like-kind exchanges are valid between and among any interest in real estate including bare land, commercial property, industrial buildings, retail stores, apartments, duplexes – even leasehold interests exceeding 30 years and some water and mineral interests as described above. With that in mind, agricultural property owners can 1031 exchange into another farm/ranch/vineyard, or into a duplex, commercial building, or other like-kind interest in real estate.




Identification of a replacement property must be in writing and can only be sent to either the exchange company, the seller, or to any other person involved in the exchange who is not a disqualified party. (The taxpayer’s real estate agent and attorneys are disqualified parties.) This identification must be sent no later than midnight on the 45th day following the sale of the investor’s property that they’re exchanging. The IRS has imposed limits on the number of properties that may be identified. These include limiting the properties to no more than three potential replacement properties (the “three-property rule”), or if more than three are identified, the total fair market value of all of the property identified cannot be greater than twice the total fair market value of the property sold (the “200% rule”).


If a taxpayer cannot meet the three-property rule or the 200% rule, there is a third rule called the “95% rule”. Under this rule, a taxpayer can identify as many properties as necessary without regard to fair market value, but must purchase 95% of the value of all of the properties identified. This generally means the taxpayer has to purchase all of the identified property which can be very difficult.


Identification should include a complete address or legal description, and if acquiring less than a 100% interest, an indication of the tenancy in common interest share being acquired.


Timing the Exchange with Planting and Harvest Seasons


The timing of harvest and planting seasons may be a critical consideration in the execution of a 1031 exchange for agricultural real estate investors. The treasury regulations surrounding exchanges impose strict deadlines not only for identifying replacement properties as described above, but for acquiring those identified replacement properties – all identified properties must be acquired within 180 days following the sale of the investor’s property. For investors dealing with agricultural assets, these deadlines might need to align with the natural cycles of planting and harvesting to minimize disruptions to ongoing operations or to leverage good conditions for a sale. For instance, consider a farmer in California selling a vineyard in the summer, who wants to exchange into another vineyard property. To utilize a 1031 exchange effectively, they must identify potential replacement properties by late summer or early fall to meet their identification deadline. Allowing time for due diligence and negotiation, and taking into consideration harvest activities, they may face challenges in finalizing the purchase in time to meet their exchange deadline. Additionally, if the purchase will include severed crops (wine grapes), they must consider that exchange proceeds cannot be used for the purchase of the personal property portion of the purchase. In other circumstances, the time of year of a sale may make it difficult for the investor to find suitable properties for reinvestment, depending on what they’re looking for in the property. This intricate dance between the 1031 exchange deadlines and the seasons underscores the importance of meticulous planning and strategic timing that is unique to exchanges of agricultural property.  




The sale of a farm or ranch typically involves more than just real property. Understanding different tax tools can help investors maximize their tax saving and the amount available for re-investment. Working with a qualified intermediary as well as tax and legal advisors well-versed in both 1031 exchange rules and agricultural real estate can provide invaluable guidance to investors seeking to leverage this powerful tax strategy in their agricultural land investments.