Choosing the right tax strategy when selling farmland can make the difference between preserving your wealth or losing a significant portion of it to capital gains taxes.
If you’ve held onto a parcel of farmland for years, or even generations, appreciation has likely skyrocketed. And once you sell, the IRS will be waiting with a sizable capital gains tax bill. While we can’t tell you how to avoid capital gains tax when selling farmland, legally. We can help you reduce or defer those taxes using a 1031 Exchange or Deferred Sales Trust (DST). Which option gives you more control, flexibility, and long-term benefits?
To determine which tax strategy is the right move, you need to know how they work. Here’s what you should know about 1031 Exchanges and DSTs when selling farmland:
Understanding a 1031 Exchange
A 1031 Exchange allows you to defer capital gains taxes by reinvesting the proceeds from your farmland sale into another like-kind investment property.
At first glance, this may seem like a straightforward solution. You sell one property, you buy another, and you defer the tax hit. However, there are significant limitations.
Strict Timelines
The IRS imposes strict timelines and requirements for a 1031 Exchange. You have 45 days to identify potential replacement properties and 180 days to close on the new investment. This tight window can create unnecessary pressure, especially when the farmland market doesn’t offer ideal reinvestment opportunities within your timeframe. If you miss the deadline or can’t find a qualifying property, you could forfeit your ability to defer taxes altogether.
Limited Diversification
Another major limitation is the lack of diversification. Because a 1031 Exchange ties your money up in another piece of real estate, you have limited flexibility and you’re locked into the real estate cycle. This may force you to invest in a property you don’t actually want just to avoid paying taxes.
If your goal is to fully exit farmland ownership or diversify away from real estate altogether, the 1031 Exchange may not give you the breathing room you need. It’s effective, but it’s also rigid.
Understanding a DST
A DST offers an entirely different approach to tax deferral. Instead of being forced to buy another property, you sell your farmland to a trust in exchange for a promissory note. The trust then sells the land to the buyer and holds the proceeds. Because you didn’t receive the money directly, you don’t owe capital gains taxes at the time of sale.
And when we dig deeper, the DST offers additional benefits to investors.
Extended Timeline
One key benefit of a DST is that you eliminate the pressure of reinvesting in a specific timeline. You don’t have to hunt for a replacement property or rush a decision. Take your time deciding what and how you want to invest your funds. What will fit best into your financial plan?
Greater Flexibility
DSTs also give you complete flexibility over how and when you receive your money. You can structure the promissory note to provide interest-only payments over time and pay ordinary income tax on your payments. This payment structure may help you spread out your tax liability in a way that fits your retirement or estate planning goals.
Investment Freedom
DSTs also give you investment freedom. Rather than locking you into another property, they allow you to invest the proceeds in a diversified portfolio that includes stocks, bonds, private equity, or other vehicles tailored to your risk tolerance and financial strategy. This is especially advantageous for farmers looking to reduce risk exposure or pass wealth to the next generation.
Which One Is Right for You?
Choosing between a 1031 Exchange and a DST comes down to your personal goals. If you’re committed to staying in real estate and are comfortable with tight deadlines, a 1031 may serve you well. But if you want more control, investment flexibility, and a long-term exit from active land management, a DST is a compelling, strategic 1031 exchange alternative.
Here’s a quick summary to help guide your thinking:
- 1031 Exchange Pros: Simple deferral structure, familiar process, ideal for reinvesting in real estate.
- 1031 Exchange Cons: Strict timelines, limited diversification, no option to exit real estate.
- DST Pros: No reinvestment pressure, customizable payout terms, diversification opportunities, better estate planning fit.
- DST Cons: Has a slightly more complex setup process, which requires experienced guidance.
Whatever path you choose, the most important step is working with a tax advisor who can evaluate your specific situation and help you clearly navigate the legal, financial, and investment implications.
Preserve More of Your Wealth with the Right Strategy
Selling farmland doesn’t mean you have to hand over a large portion of your profit to the IRS. By understanding the key differences between a 1031 Exchange and a DST, you position yourself to make smarter decisions for your long-term financial stability.
A DST can offer the investment flexibility and wealth preservation you need, especially if you’re ready to move beyond the farming lifestyle or diversify your assets. If you’re considering a sale, now is the time to explore your options with a knowledgeable capital gains tax advisor.