1031-Exchanges have been a mainstay for farmland sellers to defer capital gains in a like-for-like transaction. The farmland owner’s CPA is very conversant in the ‘language’ of the 1031-Exchange in addition to the attorney and banker who support the farmland owner.
But what happens when a capital gains deferral approach, although almost 100 years old, is introduced as an alternative to the 1031-Exchange? Is it too confusing...too complex...not understandable…is it really in the tax code? It's called Section 453 and it is really quite simple and extremely powerful.
Section 453 History
Section 453 – Installment Sale – was introduced way back in 1918 with several major changes since (1926 & 1980 were most significant) as a benefit to farmers and farmland owners. The monetized installment sale was reviewed by the IRS in their 2012 Memorandum that provides guidance to those wishing to defer capital gains taxes (as well as ordinary income tax) in agriculture.
Farmers First Trust utilizes the IRS Memo guidelines with MDPT (Monetized Deferred Payment Transaction, US Patent Pending) for farms and farming purposes.
So, what are the differences between MDPT and a 1031?
MDPT vs 1031
Who Will Benefit from MDPT?
When is MDPT a preferred choice for farmers and farmland owners? Here are several situations that MDPT would be a valuable choice:
Siblings and heirs to farms and ranches that may not have lived on the farm for generations. These owners have decided to sell but hesitate due to capital gains taxes.
Farmers that have used 1031-Exchanges to reinvest when cities grow into farmland. But this time, deferring taxes and receiving funds via loan provides additional flexibility for the future.
A farm couple that has decided to sell and ‘cash out’ from farming. They have loved farming, but it’s time to move on to the next phase of life.
A farmer that has a majority of their operation in rented acres and has decided to sell a few of his own acres to improve their income statement. Deferring the capital gains and receiving a loan allows for the reinvestment they need.
Livestock and commodity farm operations can sell product but defer ordinary income taxes and receive a loan of up to 95% of the net sale to grow and build towards the future.
MDPT offers the farmland seller flexibility far and away more expansive than a 1031-Exchange. Agriculture is under extreme financial pressures today and MDPT provides unlimited opportunities to invest the deferred tax dollars back into farming or in another asset class.
The choice is yours, look into MDPT and see how it can work for you!