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Taxlink                       11/27 16:29

   Real vs. Personal Property

   DTN Tax Columnist Rod Mauszycki gives an overview of 1031 Exchanges for 
those farmers considering leaving farming.

Rod Mauszycki
DTN Tax Columnist

   It's been a trying year. Commodity prices have been volatile, and the 
weather has wiped out large sections of crop. The stress has taken its toll on 
the farm community.

   I've had more than a few clients and prospects contact me about exiting 
farming. Typically, I tell farmers you need three to five years for an 
effective exit plan; however, they want out now. Luckily, there are a few tools 
we can use to help mitigate the tax burden. In the past, I've written about 
Delaware Trusts and 1031 Exchanges. With newly issued proposed regulations, I 
thought it would be a good idea to review what is real and personal property in 
light of 1031 Exchanges.

   1031 EXCHANGE

   The term 1031 Exchange is related to the Internal Revenue Code Section 
1031(a), which says "no gain or loss is recognized on the exchange of real 
property held for productive use in a trade or business or for investment if 
the property is exchanged solely for property of a like-kind which is to be 
held either for productive use in a trade or business or for investment."

   What prompted the proposed regulation is that under the Tax Cuts and Jobs 
Act, tangible personal property held for productive use in a trade or business 
no longer qualifies for a tax-deferred exchange. That is why your tax preparer 
now asks for the full purchase price and the trade value for equipment trades 
(prior we would ask for boot). Because of the change, it's important to 
understand what is real property and personal property.

   REAL PROPERTY

   To oversimplify, real property encompasses almost all business use or 
investment real estate (except for real estate held as inventory). This 
includes structures like houses, apartments, hotels, factories, office 
buildings, warehouses, barns and other farm structures (that are not removable).

   Real property also includes easements (30 years or more in duration), 
options to acquire real property and growing crop/trees (until they are removed 
or severed from the land). Improvements to land that are considered inherently 
permanent structures and/or structural components of a permanent structure are 
considered real property. Some examples are fences, grain bins and silos.

   PERSONAL PROPERTY

   Personal property is machinery or an item of machinery that is not a 
permanent structure or affixed to a permanent structure. If the personal 
property is interconnected to a permanent structure, it is looked at as a 
whole. For example, a gas line to a permanent grain dryer is real property, but 
a gas line to a portable dryer is personal property.

   In regard to a 1031 Exchange, incidental personal property may be included 
as part of the exchange.

   Incidental is defined as the personal property that does not exceed 15% of 
the aggregate fair market value of the replacement of real property.

   As you can see, this can be confusing. If you are thinking about a 1031 or 
Delaware Trust, consult a tax professional. It's better to be aware of the 
potential traps and tax ramifications up front.

   **

   DTN Tax Columnist Rod Mauszycki, J.D., MBT, is a tax principal with CLA 
(CliftonLarsonAllen) in Minneapolis, Minnesota. Read Rod's "Ask the Taxman" 
column at about.dtnpf.com/tax. You may email Rod at taxman@dtn.com.




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