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Thumb of Michigan | Not for sure that I understand your question, I'll give it a shot anyway. On your example of spending up to $5750 for $5000 ground, at that point you're just changing money. Its a toss up whether you purchase the land via a 1031, or you just cash the check and pay the tax. The argument could be made that the land might appreciate, but the cash might (well, more than likely will) appreciate as well. More of a personal choice I guess. And what it is you have as a goal. Where you're moving into negative territory is if you pay, say $6000 for a $5000 farm. You could have sold the original land, paid the tax, and just bought the farm outright for $5000 and been ahead. By paying 1000 more than necessary, your effective tax rate has increased from 15% to 20% by overpaying by 20% (1000).
Just to be maybe more clear on this, I'll use some of your numbers:
You sell a farm for $10000 and acre. You originally bought the farm for $2000 (for example) so you have capitol gains exposure of $8000. The $8000 part is what you might consider a 1031 exchange on. Another misconception that happens at this point- if you successfully complete the trade, the capital gains taxes don't go away- they are deferred down the road. The tax follows this trade and every other trade down the road. Its going to be paid at some point, although if I'm not mistaken, it goes away upon the death of the person owing it. Anyway, its the $8K that's subject to capitol gains at some point, irregardless of what the purchase price of the new land is.
Should also mention: some states also levy capitol gains taxes. Really need to work with a qualified intermediary to make sure the ducks are lined up correctly.
Edited by pat-michigan 12/4/2010 22:48
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Someone explain to me how a 1031 exchange is good for farmers...
