What is a 1031 Exchange?
Ranches which have been in the same ownership for many years may 
have a very low tax basis. So, when they sell at today’s appreciated prices, the Sellers face a very large Capital Gains Tax.
There are only two legal methods for Sellers to avert this Capital Gains Tax bite. One way is to put the ranch property into a Charitable Remainder Trust, prior to any sale. The other method is to execute an Internal Revenue Code Section 1031 Tax Deferred Exchange. You may combine both methods and execute a 1031 Exchange on a portion and as well as a Planned Charitable Gift on another portion of the sale.
The law provides that if the Seller exchanges into another ranch or business use or investment property of equal or greater value, and uses a Qualified Intermediary to facilitate the exchange transaction and hold the funds, the Seller normally does not pay any Capital Gains.
Therefore today, almost every sale of Montana farm, ranch or recreational property involves a 1031 Exchange. Normally you’ll see the 1031 Exchange verbiage in the ranch offering and/or in the Buy/Sell Agreement. The exchange rules are complex, so I recommend that if you are a Seller, you should hire a Qualified Intermediary. If you are a Buyer, and the Seller asks for your cooperation on a 1031 Exchange, the Closing Agent will have forms explaining all of the details of the Exchange, and the Intermediary’s function. It should not delay the closing, nor should it add to the Buyer’s costs or liabilities.
You may have also heard of “reverse exchanges”. This type of transaction is typically required when a Seller finds a replacement property they want to exchange into before they sell their relinquished property. These “parking arrangements” are also offered in Montana and the rest of the Rocky Mountain region. It is important to work with an exchange company who follows the IRS guidelines.
For Forward Exchange transactions and the more complex Reverse Exchange transactions, I recommend:
Max A. Hansen
Executive Vice President
P.O. Box 1031
8 South Idaho, Suite A
Dillon, MT 59725
www.accruit.com
800-237-1031 or 303-865-7320 Office
406-660-1031 Cell
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