farm to rental investment on 1031

[Young Nguyen]

I'm in the process of selling my farm, am I able to use my 1031 to get rental homes? sorry for such a noobie question, I tried searching but couldn't come to find anything conclusive 

[Dave Foster]

@Young Nguyen, Not a noob question and actually one that has some potentially very good answers for you.

First of all a 1031 exchange is a sale of any type of investment real estate and a purchase of any other type of investment real estate. So you can definitely go from agricultural to residential.  

Secondly all the property you place into the 1031 must be used for investment.  In the case of farms there are usually two components - the homestead and the rest of the land.  The homestead (primary residence) portion of the farm will not qualify for 1031 treatment.  It is actually eligible for the much better primary residence exclusion.  If you have lived in the homestead portion of the farm for 2 out of the 5 years previous to sale then you get to take the first $250K ($500K if married) in profit tax free.  The remainder of your farm then goes into your 1031 and you can use it tax deferred to buy residential rentals.  

The application of 1031 to the family farm to generate tax free profit as well as moving tax deferred from farming into a hopefully more lucrative and less demanding form of real estate investing is one of the most powerful uses for the 1031 exchange.