Hobbling the competition...

In true farm-lobby fashion, producers outraged that a legislative good deal is being exploited by ordinary citizens have managed to insert some serious curbs on 1031 land exchanges.

As part of the bill, the Senate is proposing to change the 'like-kind' standard to provide that “unimproved agricultural real property” is not like-kind to “improved real property”. “Unimproved agricultural real property” is defined as agricultural land that is enrolled in certain farm subsidy programs, unless the agricultural land is permanently retired from the farm subsidy programs prior to the date of an exchange transaction. Much of America's agricultural land is subject to these subsidy programs. What does this mean for exchanges of agricultural properties? It prevents farmers, ranchers and owners of agricultural property from exchanging out of improved agricultural property (livestock facilities, grain elevators, machine sheds, fence, tile etc.) and into the subsidized agricultural land. It also prevents farmers and ranchers from exchanging the subsidized agricultural land for any improved real property, including commercial, residential and tenancy-in-common (TIC) properties. Finally, it prevents owners of commercial and residential investment properties from exchanging into the subsidized agricultural land. Most likely, these provisions will result in agricultural land owners having limited choices in exchanging their farm or ranch land. If they decide they'd like to reinvest their land sale proceeds into an improved investment property they will be forced to pay the tax or exchange and lose the land's future ability to qualify for subsidies (thus potential reducing the value in the land). As you can see, this provision will have a significant impact on those that work with agricultural land and on those communites that are located in agricultural-based areas. [More]

The two sides here are interesting combatants. First, there is the 1031 industry of accountants, realtors, and financial advisors along with landed farmers close to retirement. These folks are driven by the rule that most Americans will spend $0.99 to save $1 in taxes.

In the other corner are farmers hoping to buy without having to compete with "outside" money. Tax-free exchanges have time limits and the feeling is that desperation in the last few days of the swap period drives land prices way beyond sanity.

My thought is most legislative inhibitions on free market action tends to come back and bite your own behind. Plus in the long run they tend to be futile as the restrictions get priced into the assets.

Still, for an industry that has worked to insert bizarre little goodies into any legislative package within reach, agriculture seems to be strangely unprepared for the same from other special interests.

My preference would be for capital gains taxes to be reduced to about 8%, at which point owners, buyers and the government could all be winners.