Buying Land For Hunting Clubs Using The 1031 Exchange

Buying Hunting Land
Let's start by looking at a typical scenario. A hunter grows disenchanted with the quality of his hunting area and decides he wants to do something about it. He has three options. First, he can work with other hunters who are using the same property in an effort to plant food plots and make policies that will improve the age structure of the bucks on the land. This is by far the least expensive solution and if human nature were more predictable, it would be the only one any of us would use.
However, other hunters are not always accommodating to what we may want to do and not every landowner really cares enough about his or her deer herd to give up valuable pasture land or farm land for the better management of what he may think are a scourge on his crops.

The zero cost solution can sometimes work for the diligent hunter, but as many game professionals are quick to point out, it's easier to manage deer than people. In other words, getting the needed cooperation will take time, maybe years, and lots of effort on your part. It can be done so don't give up if you can't afford to buy your own hunting land.

It is very satisfying to shoot a buck on a farm that you own and manage. Being involved in the management of the property adds an extra level of excitement to the hunt.

A Case for Buying Land
If you buy the land, it is yours to control exclusively until you die or until you sell it. No one can take it away as long as you keep making the payments. You know you will benefit from any long-term improvements that you make in the deer herd. Obviously, from a pure control standpoint nothing matches owning the land you hunt.
However, there is also a downside. Owning land requires time and focused attention if you are going to manage it well. Someone needs to patrol it, someone needs to work with the government on farm programs, someone needs to plant the food plots, someone needs to buy equipment and perform basic maintenance on the property, someone needs to work with timber buyers, etc. Of course, these are the rewarding aspects of land stewardship but they still take time - or if you will have someone else do everything, it takes money.

Where to Buy
Where you buy land for deer hunting is just as important as the type of ground that you buy or lease. If you can't afford to tie up a huge block of habitat - enough land to completely encompass the home ranges of several bucks - then you are only going to be as good as your neighbors. The old statement that birds of a feather flock together has never been truer. Find other quality deer managers who share your philosophies and get as close to them as you can. Not only will you benefit from their efforts, but they will also benefit from yours.
Without a doubt, you will pay a healthy premium to buy land in the best areas. From what I've seen in many areas of the country, you should expect to pay at least 25% more when purchasing land that is ideally situated for deer management over and above what you would pay for similar property that is more isolated.

A potential deer manager can also benefit from sharing a border with a large parcel of land that is off-limits to hunting. These sanctuaries serve to improve your hunting immediately by providing an instant supply of bucks that have reached an older age class. Also, a bordering sanctuary increases the odds that any bucks you pass up will see another birthday.

When you own your own land, you have the security of knowing that it will be there as long as you want to keep it. You will never lose access. That produces a lot of peace of mind if you have dreams of hunting for many years to come and of introducing your children or grandchildren to hunting.

If I had to choose between bordering a good area that is well managed for deer, but hunted, or one that serves as a sanctuary totally off-limits to hunting I'd choose the hunted area. With a total sanctuary nearby you will have a harder time controlling doe numbers and a correspondingly harder time producing enough food to fully nourish all the deer that will pour out of the sanctuary into your fields every night.

You can find large managed blocks of land by simply asking about them at most small town coffee shops. Townsfolk are generally all too ready to discuss what those "crazy folks are doing' out there". Start by picking the very best hunting area within reasonable distance of your home and spend a long weekend snooping around. You'll quickly find what you're looking for - if it exists.

Obviously, you can find out about large off-limits parcels the same way, but you can also look at a plat map of the county and pay particular attention to the larger landholdings. If the designated landowner has words like, park, conservatory or trust in their names, the odds are higher than normal that these properties are off-limits to hunting. Plat maps can be purchased at the county court house in the county seat.

Start your search by studying maps and making calls to determine the best neighborhoods within reasonable driving distance of your home.

The Proper Land Mix
Ideally, any land you buy should have a habitat to field ratio of about three or four to one. This will permit you to provide plenty of food while still having enough huntable cover to spread your impact while you provide a good home for the maximum number of bucks. Keep in mind that you can utilize 10% of any CRP acres for food plots.

The Unfortunate Consequences
Whenever the free market system attributes a price to something that was once free, someone is going to gain and someone else is going to lose out. The buying of land primarily for the purposes of hunting has a way of dislocating people who have possibly hunted these farms for generations. Understandably, they are going to be upset and very disappointed. Wouldn't you be? And while it's easy to say, "Well, they could have bought it too." That doesn't always wash because there are many fine people who will never be able to afford hunting land.
When you buy land and make it off limits for all but yourself and a few lucky friends you have started the process that eventually will result in these same fine people going without a place to hunt. Should they be priced out of hunting? It is a question you will be forced to grapple with at some point if you head down this road.

At the very least, you need to be sensitive to this aspect of private land management, but you may be able to take things a step farther. You are going to need help, and if you can maintain a civil relationship with at least some of the previous hunters of the property, you can possibly create a win-win for those who are respectful of your rights. I've seen it work many times.

The steps required to manage hunting property will take a lot of time, but they will be a labor of love. If you don't have the time to spare, consider the cost of hiring the work done when determining how much land you can afford.

Once the management plan gets up to speed, there will be opportunities for multiple hunters. Don't forget, you can't stockpile bucks - some will disperse. And if letting someone else shoot a buck every once in a while will give them the incentive to help you keep your doe herd in check and the motivation to watch over the place when you're gone, what is the real harm? In the end, you stand to gain much more than you give up.

Land that sets up well for deer management is not around every bend in the road. In the first place, it should be ideally situated on the border of a management-friendly property, and then there is always the problem of supply. Just because you want to buy land doesn't mean someone wants to sell it to you. Finding the right ground is a labor-intensive process that may take months, possibly even years. But, if you invest the time to do it right you may only have to do it once and you'll benefit from the fruits of your labor for years to come.

Ins and Outs of the 1031
The 1031 tax exchange is a much-used method for turning a little into a lot. Understanding how it works is critical to making the best use of this important investment tool. Many deer hunters have used this tool to accumulate their dream property, myself included.
The 1031 tax exchange is one of the key factors keeping a fire lit under the land boom. It takes its name from the section of the IRS code in which you will find it. Concisely, the 1031 tax exchange allows you to sell one piece of real estate and replace it with another one while deferring capital gains tax and recaptured depreciation to a later date when you choose to cash out of your real estate holdings - if ever.

The Strategy
You want to own your dream hunting land, but you haven't been able to find it. At the same time, you keep seeing the price of land going up. You fear that the price will grow too high before you find the dream piece and you will no longer be able to afford it. This is a common problem, but thankfully, there is a solution.
The best strategy is to buy a good property in a good neighborhood. Maybe it isn't your dream piece, but it is good nonetheless. You can improve it and pour your heart into it. When your dream piece does come up on the market, you will have a high quality piece to sell and then you can exchange the capital gain (using the 1031 tax exchange) into the dream piece. Ideally, you can get an option on the farm you wish to buy, giving you some time to sell, or possibly you can get the seller to sign a contract permitting you to sell yours first.

Many deer hunters also use the 1031 exchange to trade up for larger pieces when they have accumulated good equity in their initial piece of land. They then use this equity as the basis for a large down payment in their bigger dream farm. Of course, not having to pay capital gains taxes makes the equity go a lot farther.

Overall, the 1031 is a great tool for deer hunters looking to make the most of their money. I have used it three times during the past three years to help accumulate more land near my home. In the process, I figure it has saved me nearly $90,000 in taxes! I then put that $90,000 to work buying land rather than paying taxes.

Gray Area
There is a gray area related to the 1031 exchange that I have encountered a few times. A number of land investors I know are under the impression that the velocity of their transactions will some day get them in trouble. They fear that because they are buying and selling often, in the event of an audit their 1031 activities will be disqualified.
I spoke with three different accountants about this and each had a slightly different take. My personal tax accountant said these fears are unfounded. Here is a portion of the actual language in section 1031 of the actual IRS code:

"...no gain or loss is recognized if property held for productive use in a trade or business or for investment is exchanged solely for property of a like kind to be held either for productive use in a trade or business or for investment."

The problem lies in the interpretation of the word "investment". Some think that investment carries with it an implied holding period. That may or may not be the case. My accountant doesn't think so. But to be on the safe side, if you are able to hold the land for at least one year before "trading up" you won't have any worries.

Some properties are diamonds in the rough. Once you do the necessary improvements, such as building roads, crossings and clearing old brush-choked fields, they become much more valuable.

An even bigger issue revolves around the actual taxes triggered when you finally cash out. This confusion stems from the fact that the 1031 is a tax deferral tool. The word defer implies that you will pay them later. When you cash out you will trigger taxes all the way back to the first sale. Some believe that transactions involving properties held for less than a year will be taxed at the short-term rate even though you used the 1031 to move the proceeds into another parcel.

Again, according to my tax accountant, these fears are unfounded. According to him, as long as you hold the final property for at least a year before selling it, you only pay long-term capital gains back to your original basis - the original cost you paid for the first property.

Other accountants interpret this differently, as noted. They suggest that you will actually be triggering short-term capital gains on the properties you held for less than a year. My accountant assured me numerous times that this is not true. But to be safe, be sure that you come to a complete understanding of this issue with your own tax accountant before you trade up with property that you have held for less than a year.

How the 1031 Tax Exchange Works
You must make a like-kind exchange. Like-kind has a broad interpretation. For example, I know a realtor who specializes in helping customers from California park the proceeds from the sales of their franchise properties in farmland until they can find a different use for the money.

My own experience with the 1031 exchange has been tame by comparison. I replace rural land with rural land. It is very simple. However, any kind of real property is exchangeable with any other kind of real property. However, you can't exchange the sale of ownership in a subchapter S land corporation with personal property or other shares in a subchapter S. I tried to pull that off once and was shot down. Stock in a limited partnership is not real property.

The 1031 exchange works as long as you never have actual or constructive receipt of the funds from the sale of the relinquished property before those funds are used to purchase the replacement property. In other words, an intermediary has to handle both closings for you and you can't have any kind of access to the money - even to borrow against it - until the entire process is completed.

Working with the Intermediary
You empower the intermediary to receive the proceeds from your sale and further instruct the intermediary as to which property you want to purchase as the replacement. The intermediary then makes the purchase (or purchases) on your behalf and finally signs the purchased property (or properties) over to you after the closing.
In exchange for this service, you pay the intermediary a fee. I'm sure it depends on your market and the nature of your transaction, but in my experience the intermediary receives well under $1,000 for a simple exchange.

Typically, a lawyer handles most of my transactions. He finds another attorney in the area that he is comfortable with to act as the intermediary. There are also hundreds of specialized companies set up to serve as intermediaries throughout the country. The intermediary doesn't have to be a local entity to handle this service for you. If you type "1031 tax exchange" into your internet search engine, you will quickly see that you have many options.

Forestry consultants will be able to provide much needed expertise when setting up your management plan.

You must notify your buyer and seller that you are going to perform a 1031 exchange because they have to sign off on the exchange. They are effectively acknowledging that you have empowered an intermediary to act on your behalf in these transactions. You typically make this notification in the purchase agreement so the buyer and seller are bound by law to cooperate.

If you plan to execute a 1031 exchange, or think you might, be sure to add the appropriate language to any purchase agreement you enter into regarding the relinquished property and the replacement property.

You have 45 days starting the day after you close on the sale of your relinquished property to identify its replacement. If you don't notify the intermediary of the replacement within this time, the 1031 exchange will fail and you will immediately trigger the transfer of your assets into your name and you will be responsible for any taxes that result from the sale. Further, you have 180 days starting the day after your closing on the relinquished property to close on its replacement.

You can identify more than one replacement property. Certain rules apply if you identify more than three, so be sure to consult with your intermediary if you are considering identifying four or more properties.

The exchange has to take place within a single tax year. You may be able to play some games with filing dates to make that work, so consult with your tax accountant if you are at risk.

Types of Exchanges
There are several types of 1031 tax exchanges. I have detailed them below.

Delayed exchange: The most common type of 1031 exchange used is the delayed exchange. This is the type that I have discussed so far, where you sell the relinquished property first and then purchase the replacement property.

Simultaneous exchange: For an exchange to be a simultaneous exchange, both closings must occur at the same moment - the closing for your sale and the closing for your purchase. Again, this satisfies the requirement that you have no actual or constructive receipt of the funds of the sale of the relinquished property before purchasing the replacement. At one time, this was how all exchanges were done, but today, simultaneous exchanges are rarely used.

Improvement or construction exchange: Construction exchanges permit you to make improvements on the replacement property before assuming ownership. To do this, the intermediary makes the improvements before signing the property over to you. For example, suppose you sell a parcel of land near the city worth $300,000. Your goal is to use the proceeds to buy a piece of hunting land and put a cabin on it. You can defer all the capital gains taxes on your sale as long as the replacement property, plus the improvements (the cabin), are worth at least $300,000.

Reverse exchange: Reverse exchanges are the most complex. In this scenario, you buy the replacement property before relinquishing the original property. Again, you can't hold title to both at the same time. An Exchange Accommodation Titleholder makes the purchase and holds the title of the replacement property on your behalf and this starts the clock ticking. You have 45 days from that closing to identify the relinquished property and 180 days to close the sale of the relinquished property.

Obviously, identifying the relinquished property is easy, but closing it in 180 days may not be so easy unless you already have a buyer on the hook.

Partial exchange: You don't have to use every dollar of the proceeds from the sale of your relinquished property to purchase a replacement property. If you use only a portion, the taxable gains are pro-rated accordingly. If you perform a partial exchange, the amount of money remaining after the replacement property is purchased is called cash boot.

When performing an exchange where the relinquished property is under mortgage, you still have to replace the entire sale price of the relinquished property (not just your equity) or the IRS will treat it as a partial exchange. You can replace the debt with cash or new debt to defer all capital gains taxes. However, if you don't, you will have what is called mortgage boot, which will incur a tax liability.

The 1031 tax exchange is a powerful tool for those looking to upgrade to their dream hunting land, which should be a big part of your long-term strategy.

Hunting Land in the Midwest
Recreational land has been hot in the Midwest, but with the economy showing signs of weakening, the demand for hunting land has also weakened. However, there has been one exception: the high quality hunting properties have maintained their upward price momentum better than lower quality properties, in most areas.
Of course, the real action is with the whitetail hunters. Waterfowl hunters are second in line. Despite the buying interest, you can't assume it will always be red hot so it pays to know how to identify quality. Quality hunting land has the best chance to meet your short-term goals and at least hold its own if the market turns tough.

Most farms in the Midwest that have timber on them have a huntable population of deer. The payoff comes when you find (or produce) farms that go a step further, that are well managed - where fully mature bucks exist in herds that have balanced buck to doe ratios well within the carrying capacity of the habitat. This situation doesn't happen in a vacuum, nor does it happen by accident. It takes a plan, real commitment and good neighbors.

Some hunting land will produce marketable timber, but typically, the most sought after deer hunting land in the Midwest produces very little income.

When buying less than 1,500 acres, you are at the mercy of your direct neighbors. When I'm looking at land, I start with the neighborhood first, learn as much as I can about it, and then work my way down to the individual tract. If several of the neighbors are involved in progressive deer management, the prospects are much improved.

The subject property would ideally be in a county known for producing trophy bucks (exceeding 150 gross inches of antler on the Boone & Crockett scoring system). It is nice if there is some income to offset food plot expense and property taxes. Ideally, 50 to 75% of the total land cover would be timber. In the Midwest, this places the property in a separate category - a very attractive category - because so much of this region is plowed and planted.

Portions of the timber would ideally be in various stages of succession from brushy regeneration to mature. At least 25% of the immediate neighbors should be practicing some form of quality deer management (shooting plenty of does, planting food plots and letting bucks grow to maturity).

You may not touch all these bases, but touch as many as you can. In most Midwestern settings, this type of property will create the highest long-term value and will produce the best recreational opportunities.