Where is the Land Market Headed? Inflation, Capital Gains Taxes and the IRS 1031 Exchange?
At Mason & Morse Ranch Company, dba RANCH COMPANY, we market a variety of properties across the U.S. including farm, ranch, timber, recreation, conservation, production & lifestyle assets. Our professional agents “Live It to Know It” and offer our clients more than 133 years of experience in land management, real estate sales and marketing.
In our Previous farm ranch land market report article dated June 1st, 2021, we commented on the Federal Reserve’s Transitory” view of inflation. Which we now know was far from accurate. We also indicated proposed increases in capital gains tax and changes to the IRS 1031 exchange program, by the Biden administration, were market drivers to sell, thereby, locking in tax brackets and the 1031 exchange opportunity. These were the two most common topics in conversations and decision points with clients throughout 2021.
Last year we reported the overall, consumer expectations for inflation had risen to more than 4.8%. currently, the annual inflation rate for the United States is 9.1% for the 12 months ended June 2022, the largest annual increase since November 1981, according to U.S. Labor Department data published July 13th, 2022. Inflation has doubled and that figure may continue to increase even with the Federal Reserves “Hawkish” approach to raising interest rates and efforts to drive the U.S. into a recession mild and or otherwise.
Throughout last year, buyer demand was very strong across the different farm, ranch and land asset types Mason Morse Ranch Company brought to the market for our selling clients. In fact, 2021 was the best year in terms of gross volume and acres sold since the Ranch Company was founded. We did expect to see strong activity for land and most forms of real estate with a farm, ranch, recreational or conservation characteristics and those expectations were exceeded.
Farmland Market Report
Agriculture production farmland was the slowest to transact in early 2021, but during that period we were seeing signs of increased demand as the year continued. The ability to turn a profit or return on investment was impacted by low commodity prices and high input costs in 2020 and 2021. That trend has changed significantly however with commodities prices reaching highs not seen since the mid 2000’s. Input costs for agricultural production continue to increase with inflation and various supply constraints, but overall profit will rise for producers if the crops make it to harvest in 2022.
Farm and ranch land asset types are considered a safe investment by many, if purchased wisely. For investors looking to secure their cash as a hedge against inflation and recession talks spread across the news a farm, ranch and land may be the right investment decision. Re-Allocating your current real estate assets to one or more of these property types now, could be opportunistic.
With the demand for such assets and the increase in overall price per acre the annual operational return has downward pressure towards the 2-4 percent range but, keep in mind it’s an asset type that also helps feeds the world and carries with it appreciation. It rarely decreases in value from decade to decade.
Ranchland Market Report
Privately owned range and pasture lands makes up over 27% (528 million acres) of the total acreage of the contiguous 48 states, and these lands constitute the largest private lands use category, exceeding both forest land (21%) and crop land (18%).
In 2021, ranches comprised of range and pasture lands for grazing cattle and other livestock saw an overall appreciation rate ranging from 4-7 percent depending on location across the West. During this period overall U.S. inflation was tracking between 4-5 percent and was on the rise. Ranchers and investors were aggressively pursuing purchase opportunities to increase operational size or to acquire more land, anticipating higher inflation in the next year. As we navigate into the second half of 2022 with inflation moving past 9 percent, we anticipate ranchland appreciation will track upward beyond last year’s figures and may top 10 percent or more due to lack of ranch land inventory for sale and high demand for safe inflationary assets. Higher meat prices and drought conditions across the country are impacting ranching operations but cattle prices are moving up steadily. Production costs are a factor in operations and people are continuously evaluating better ways to stabilize their cost structures, including adding more pastureland as an offset to lowering the mechanized feed production that exists. Health factors have added to the demand for grass-fed beef and carbon sequestration have put both grassland and timberland in the spotlight. Ranch land investment is on the rise as an investment inflation hedge which is adding more demand to the market equation.
Capital Gains Tax and 1031 Exchanges
Your capital gains tax rate will most likely increase for all tax brackets if the current administration remains in office and proposed tax changes become law. The increases may lean more heavily to the super wealthy, but any farm, ranch and landowner will see an increase if property is sold regardless of tax bracket. A percentage point or two increase in capital gains would not be all that worrisome, but in combination with big changes to the IRS 1031 “Like Kind” exchange would negatively impact the real estate investment markets and overall U.S. economy already on the edge of a recession.
President Biden’s proposal to change 1031 exchanges would severely limit property values investors/property owners are currently able use to defer capital gains taxes and would severely impact the overall U.S. economy.
What is most gregarious about the proposal is that the effective date for the change would be December 31st, 2022. This will leave limited time for any property owner in 2022 to complete an IRS 1031 Exchange from now until the end of the year.
The proposal would only allow the deferral of gains up to an aggregate amount of $500,000 for each taxpayer ($1 million in the case of married individuals filing a joint return). Any gains from like-kind exchanges in excess of $500,000/$1,000,000 a year would be recognized by the taxpayer in the year the taxpayer transfers the real property subject to the exchange and a capital gains tax would be due.
If the proposal is approved, real estate investors will have a limited tax vehicle to maximize their assets and trade into another asset for investment, tax deferred. Most if not all farm, ranch, land and commercial property owners will just sit on their current real estate holdings until another tax law change or an estate plan to kicks in upon death. The real estate market will become stagnate. This includes all types of farms, ranches and commercial investment properties used for business. The IRS 1031 Tax Deferred Exchange is a vital part of our economy’s stability decade to decade, changes to this tax code will have major negative impacts for investor and the overall U.S. economy.
Buying or Considering Selling, Use a Professional Land Broker
Deciding to invest in a farm, ranch or piece of land is a serious decision. Finding a quality property for the right price is essential to the overall enjoyment and use of the property along with a return on investment. On the other side of the transaction, if you are a property owner and are considering a sale of your farm, ranch or land that’s been part of a family legacy is a serious financial and emotional decision. With inflation pressures continuing to rise, recession talks and tax code changes to capital gains taxes or limiting tax deferral opportunities, now more than ever, is a time to consider working with a professional farm, ranch and land broker to sell and re allocate the sale proceeds to another asset. Our brokers “Live It to Know It” and that means our brokers work hard to find properties for clients and have sat at the same family table working out the various estate decisions needed to sell property or transfer equity from one generation to the next. It’s not easy and can take a lot of experience, travel time and communication. Therefore, rest assured when working with one of our brokers we understand the value of your property but also the financial and emotional impact it may have on all family members.
Bart Miller, ALC
Accredited Land Consultant
Mason Morse Ranch Company