Has something like this ever been done before?
Yes. Congress first passed legislation for deferred sales in 1921 with changes and updates over time including those in 1980. Large timber companies have utilized a similar approach numerous times for the sale of large tracts of timber land. The IRS provided the guideline in its 2012 IRS Memorandum.
Does this approach include just land sales or can it include crops and livestock?
Yes. Land sales and “handling, drying, packing, grading, or storing on a farm any agricultural or horticultural commodity in its un-manufactured state; and the planting, cultivating, caring for, or cutting of trees, or the preparation (other than milling) of trees for market” are included.
However, depreciated assets cannot be included in MDPT. Depreciated assets include center pivot irrigation systems or drainage tile, as examples.
Do I have to be an active farmer or rancher to use MDPT?
No, you don't need to be actively involved in farming to use MDPT. Owners of farm or ranch land who aren't farmers or ranchers can utilize MDPT, such as siblings that jointly own a farm even though none of them are actively involved in farming. The key element to MDPT participation is that the land is for farming or ranching and the grain or livestock is in an un-manufactured state (in other words raw grain and live farm animals).
Yes. As long as your farm is classified as a farm under IRS guidelines (see above) you can implement the Monetized Deferred Payment Transaction MDPT for up to 30 years! The grain, livestock and farm land can be sold and the tax dollars deferred. This includes ordinary income and capital gains taxes. The key part of MDPT is that you will receive up to 95% of the total net sale in the form of a loan.
If it’s been done before why haven’t I heard of it?
Fortune 500 timber companies have accomplished it with the help of large banks, Big 4 accounting firms and large legal practices. Farmers First Trust Company has developed the Monetized Deferred Payment Transaction MDPT that can be used by farmers…bringing Fortune 500 value to agriculture!
I am not in the timber business…I’m a farmer, how does it work for me?
Timber land is classified within the USDA and defined in the 2012 IRS Memorandum, Section 2032A(e)(4) states the term ‘farm’ includes “livestock, dairy, poultry, fruit, fur bearing animals, and truck farms, plantations, ranches, nurseries, ranges, greenhouses, orchards, and woodlands.” Farms and farmland are actually at the core of the IRS’s perspective.
Should I get my CPA or tax attorney involved in the process?
Definitely. We require your CPA or tax attorney participation before any contracts are signed. Our approach is a powerful tool for your financial future and the involvement of your key financial advisor(s) is crucial. Farmers First Trust Company does not provide tax advice or counseling.
What can I do with the cash (loan)?
As part of the MDPT process, you can receive up to 95% of the net sale in cash (as a loan). You are not limited in what you can do with the cash. However, we suggest that you work with your CPA and/or financial advisor to develop a plan to grow the funds received so that it could double or triple (compound growth) over time.
Can I stagger the maturity dates within the same transaction?
Yes, as long as the amount totals exceeds the $1M minimum. Staggering several maturity dates within one transaction allows flexibility in your future financial planning.
Will I ever have to actually pay taxes on the sale?
Yes. All applicable taxes will be due in the year the sale (revenue) is recognized at term maturity date.
If I eventually have to pay taxes, why even go through the effort?
The Monetized Deferred Payment Transaction MDPT enables you to reinvest in your farm. Instead of paying taxes today, reinvesting in your operation enables you to fund future growth, today. When the term is mature, revenue will be recognized and taxes will be due. However, you have had years to put that money to your operation’s benefit.
Why is there a $1M minimum transaction amount?
The costs associated with the loan structure requires a minimum transaction to provide the necessary financial provisions.
Why not do a 1031 - Exchange instead of the Monetized Deferred Payment Transaction MDPT, which is better?
Which one is better for you depends upon your situation! A 1031- Exchanges 'like for like' while MDPT provides cash (as a loan) with a tax deferral. 1031- Exchanges also have tight time frames to identify and execute transactions on another property. MDPT allows you to sell you farm, defer the taxes and then invest in another farm if that is your plan. You can wait a year or two or more to identify the farm that is right for you and your situation with the loan dollars.