Ranches that have been in the same ownership for many years have a very low tax basis. So, when they sell at today's appreciated prices, the Sellers face a very large Capital Gains Tax.

There are only two legal methods for Sellers to avert this Capital Gains Tax bite. One way is to put the ranch into a Charitable Remainder Trust, prior to any sale. The other method is to execute an IRC 1031 Tax Deferred Exchange.

The law states that if the Seller exchanges into another ranch of equal or greater value, and he uses an Intermediary to step in and handle the transaction and hold the funds, the Seller normally does not pay any Capital Gains.

Therefore today, almost every sale of farm or ranch property involves a 1031 Exchange. Normally you'll see the 1031 Exchange verbage in the ranch offering and/or in the Buy/Sell Agreement. The exchange rules are complex, so I recommend that if you are a Seller, you should hire a Qualified Intermediary. If you are a Buyer, and the Seller asks for your cooperation on a 1031 Exchange, the Closing Agent will have forms explaining all of the details of the Exchange, and the Intermediary's function. It should not delay the closing, nor should it add to the Buyer's costs or liabilities.

Reverse Exchanges

A "Reverse" Exchange happens when a Seller finds a replacement property he wants to exchange into, before he sells his relinquished property. These "parking" services are now offered in Montana.

Parking arrangements, which are sometimes mistakenly referred to as "reverse exchanges," have increased in the past few years as more and more real estate professionals become acquainted with the benefits of utilizing those transactions to effect exchanges for their clients. Pure reverse exchanges, with a couple of rare exceptions, have never been approved by the Internal Revenue Service. Internal Revenue Code Section 1031 specifically notes that reverse exchanges are not covered by the section. A reverse exchange is simply a situation where the taxpayer acquires the replacement property before they divest themselves of the relinquished property.

However, taxpayers have been successful in entering into parking arrangements which basically involve an exchange accommodation agreement with a non-related entity referred to as an Accommodation Title Holder (ATH) which acquires a replacement property and holds that replacement property for a period of time until the taxpayer is successful in entering into an agreement to exchange out of their relinquished property. Once the relinquished property transaction is closed, the taxpayer through their qualified intermediary can then proceed to close the transaction with the ATH for the acquisition of the replacement property. These parking arrangements can be tricky, but as long as the real estate professionals involved know some of the pitfalls, those pitfalls can hopefully be avoided, and the transaction successfully concluded.

Please give Montana Homes & Land a call for more information about 1031 Exchanges.