The Exchange

About a year ago, we started a process on defining the future not only for myself, but for my kids and beyond. It has consumed a fair amount of time over this last year and isn't yet quite complete as of this writing but we are nearly to the end. I have had my fill of lawyer's offices, banks, government offices and just sleepless nice mulling over our decisions and wondering if we did the right thing. I think the answer is yes but I won't be around to really ever know the answer.

The first part of the puzzle has been doing some 1031 exchanges. These exchanges are named after section 1031 of our Internal Revenue tax code that allows a person to exchange appreciated real estate for similar real estate and keep the taxes owed deferred for a later date. This ability has been in our tax code since 1921 and has been tweaked and revised numerous times since. Basically under current law, this allows you to sell a property you own and purchase another property of equal or higher value and not pay capital gains taxes yet. 

Where this applies to us is that we can sell some land that isn't very good land and purchase other land that is better and will hopefully produce more income in the coming years. To do this however, law states that you have certain time limits, 45 days to pick the new property and close, and all money in the transaction must go through a certified intermediary who deals in such transactions to make sure everything is on the up and up.

So we sold two tracts of land on the farm that had marginal utility to us as farm ground but had much higher utility to the two new owners. One owner needs more space to raise feed for his cattle herd and the other owner needs more space for his organic farm. In exchange, we have purchased some higher quality farm land that we can turn around and rent for a higher amount of money. Due to the time limitations involved, it meant getting a lot of people involved to get everything traded in a short period of time which is much more involved than it seems like it should be. Wheels turn ever so slowly when it comes to deeds, money transfers and lawyers.

It also involved a fair amount of time beforehand as well because we had to identify potential buyers and figure out if we would be able to sell the land for a fair price without really having a inked deal. Likewise, we had to do some research to find suitable replacement land for our needs that hasn't been sold and we can likely buy for a price that we feel is fair. Then there is a flurry of calls to make both deals to solidify the exchange, a setting of dates not very far in the future and then weeks of finalizing details such as updating deeds, arranging down payments, providing paperwork to various offices that need the information, etc. 

In the end however, we end up with two pieces of property that are more valuable now and in the future and two other buyers end up with pieces of property that better suit their needs. Because we swapped assets within the tax code, no tax is due at this point but at some point in the future, when it transfers from owner to heir or just sold without a swap, the IRS will come looking for their share of money.