Proposed Farm Bill would limit agricultural exchanges

The United States Senate has unveiled the “Food and Energy Security Act of 2007”, otherwise known as the “Farm Bill,” which combines agricultural program proposals with tax proposals formerly included in the “4-H Bill.” The Farm Bill is currently under consideration by the full Senate. The proposed bill, as currently crafted, has a potentially negative impact for farmers and ranchers with respect to 1031 exchanges. It will limit their options to do a tax-deferred exchange out of farmland and into other real estate investment property.

As part of the bill, the Senate is proposing to change the 'like-kind' standard to provide that “unimproved agricultural real property” is not like-kind to “improved real property”. “Unimproved agricultural real property” is defined as agricultural land that is enrolled in certain farm subsidy programs, unless the agricultural land is permanently retired from the farm subsidy programs prior to the date of an exchange transaction. Much of America's agricultural land is subject to these subsidy programs.

What does this mean for exchanges of agricultural properties? It prevents farmers, ranchers and owners of agricultural property from exchanging out of improved agricultural property (livestock facilities, grain elevators, machine sheds, fence, tile etc.) and into the subsidized agricultural land. It also prevents farmers and ranchers from exchanging the subsidized agricultural land for any improved real property, including commercial, residential and tenancy-in-common (TIC) properties. Finally, it prevents owners of commercial and residential investment properties from exchanging into the subsidized agricultural land.

Most likely, these provisions will result in agricultural land owners having limited choices in exchanging their farm or ranch land. If they decide they'd like to reinvest their land sale proceeds into an improved investment property they will be forced to pay the tax or exchange and lose the land's future ability to qualify for subsidies (thus potential reducing the value in the land). As you can see, this provision will have a significant impact on those that work with agricultural land and on those communites that are located in agricultural-based areas.

We believe this is a bad provision. If you agree, please let your Senator know that you oppose Section 12504 too.