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Are Farmland Prices Being Driven Up By Provisions of the Internal Revenue Code?

Bruce Jones and, Phillip Harris (April, 2007)

Summary

Under Section 1031 of the Internal Revenue Code, owners of farmland can delay paying some taxes on capital gains from the sale of farmland. The catch to this special provision of the income tax code is that the proceeds from the sale of the land have to be reinvested in farmland or other real property within a specific period of time. These types of transactions, commonly known as “like-kind exchanges”, allow farmers to hold on to the financial capital that would otherwise go to the U.S. Treasury as a tax payment. Some commentators have argued that the recent escalation in farmland values has been fueled, in part, by the like-kind exchange provisions of the federal income tax code. The purpose of this paper is to determine if it is financially advantageous to pay more than the agricultural value of land in order to postpone the payment of taxes on capital gains from the sale of land to a developer.