Tax provision blamed for soaring land prices, squeezing some beginning farmers

Monday, December 19th 2005, 2:04 pm
By: News On 6

ST. LOUIS (AP) _ After working on a northern Illinois farm that's been in his family for 151 years, Rob Sharkey itched to break out on his own. That is, until land prices ballooned.

The 31-year-old Stark County farmer near Bradford blames a federal tax code provision widely criticized for jacking up farm prices beyond the reach of fledgling farmers and others seeking to expand.

Under so-called 1031 tax-deferred exchanges, investors _ many of them farmers _ are fetching top dollar for their land, which has become valuable for urban-sprawl development in areas like Chicago and St. Louis.

Those sellers can delay paying capital gains taxes if they plow the profits from the sale into farmland elsewhere, generally in remote areas, within a specific time period.

Such farmers find themselves with a sudden windfall and often are able to easily outbid young farmers like Sharkey, who saw the per-acre price of the land in his area skyrocket from about $2,500 to, in some cases, $7,500 _ inflation he believes has ``got to be pushed by 1031.''

``We wanted to get our own acreage, basically do what our fathers and grandfathers had done _ get in, work hard, save money and acquire new land,'' said Sharkey, whose family farm raises corn, soybeans and hogs. ``Needless to say, that goal is no longer part of our plan.''

At land auctions or sales, he laments, ``there are always people there with 1031 money.''

Philip Nelson, the Illinois Farm Bureau's president, said the issue is ``very polarizing.'' Older farmers see the land sales under the 1031 provision as a welcome boost to their retirement savings, while younger farmers such as Sharkey believe they hurt their efforts to expand or become independent of their family farms.

``If you're in a situation where urban sprawl is going to pave you over and give you a certain amount of high-level compensation for that, and you have the opportunity to roll that into another piece of property away from that sprawl, getting 10 acres for one or five acres for one, it's a good deal,'' Nelson said during the Farm Bureau's recent convention in St. Louis.

Conversely, Nelson said, ``if you're the farmer that lives next to where that money's being rolled into and you get into a competitive bidding process, in most cases you cannot compete with the dollars being thrown at it.''

Delegates at the recent farm bureau meeting argued that something has to give.

They signed off on recommendations from a bureau committee that the 1031 tax code should be tweaked, allowing property owners to buy different types of real estate, including commercial property or apartment buildings, not just farmland, said John Hawkins, a spokesman for the bureau. They also endorsed relaxing to six months the short window - generally 45 days - for reinvesting sales proceeds to avoid paying capital gains.

The state Farm Bureau and others will make their case for those changes at the American Farm Bureau Federation convention next month in Nashville. They hope to generate enough of a groundswell to press Congress for reforms, Hawkins said.

The American Farm Bureau's policy-setting board has not taken a position on the subject, the bureau's Pat Wolff said.

Wolff said the federation has not researched the issue or collected data, making it unclear exactly how common 1031 transactions are nationwide.

Nelson, the Illinois Farm Bureau's chief, said he has seen the effect of the 1031 provision around his home near Seneca in LaSalle County, where he has a fourth-generation grain and livestock farm.

``We've had a couple parcels in LaSalle County bring in upwards of $10,000 to $13,000 an acre, where you literally have two 1031 buyers competing each other because of the deadline'' to reinvest or pay capital gains, Nelson said.