Real estate brokers and agents in the Southwest and Southern Plains area shared a common concern of potential changes in the tax code regarding capital gains and 1031 Exchanges. A 1031 Exchange allows farmers and ranchers to reinvest the proceeds of highly appreciated land into other real estate and defer capital gains taxes.
Although there has not been anything definitive from President-Elect Joe Biden’s transition team, Bloomberg stated in July the Biden administration would eliminate 1031 tax exchanges for individuals making over $400,000 a year. A study by the University of Florida and Syracuse University’s Whitman School of Management shows the government is losing between $2-4 billion in tax revenue and 1031 Exchanges account for 6 percent of all commercial real estate transactions.
C. A. “Chip” Cole III, owner and operator of Chip Cole & Associates, in San Angelo, TX, told WLJ he is concerned the new administration will change the tax code regarding 1031 Exchanges and capital gains taxes. He states exchanges “remain an excellent tool” if ranchers want to change their operations and is concerned it will impact the real estate business in the second half of 2021.
“We do see some IRS 1031s [exchanges], but we haven’t seen a surge,” Andy Groseta of Headquarters West, Ltd. told WLJ. “Business is spiking and it’s tremendous, but it’s not all 1031s.” Groseta also expressed concern with potential changes in the tax code with capital gains taxes and a reversal of rules and regulations in grazing on federal land with the incoming administration.
“The reason the economy has been so good in this country is because, with the Trump administration, he’s lightened rules and regulations and made some tax incentives which have been good for business,” said Groseta. “Regardless of who the administration is, if there’s an administration that’s pro-business, it makes a big difference in the economy and that has a ripple effect on the real estate business.”
The IRS announced in November 2020 it was finalizing the regulations of Section 1031 for like-kind exchanges. The 2017 Tax Cuts and Jobs Act limited like-kind exchange methods to exchanges of real property “held for use in a trade or business or investment.” According to the IRS, real property includes land and generally anything permanently built on or attached to the land, and “certain intangible property, such as leaseholds or easements, qualifies as real property under section 1031.”
Keith Brownfield of Steinborn & Associates in Las Cruces, NM, told WLJ one of the biggest buyers in his region in 2020 were “people from out of state with 1031 monies.” Like the others, Brownfield is concerned about potential changes in the capital gains tax affecting his business.
New Mexico
Brownfield is a native to southwestern New Mexico, born in Las Cruces and ranch-raised in Deming, NM, on a fourth-generation cattle ranch. In 2002, he started in the residential appraisal business and had been a full-time realtor since 2003.
In addition to 1031 Exchanges, Brownfield stated buyers were a “mixed bag” of people buying properties next to their existing land or out-of-state buyers looking for farm and ranch land. Drought did affect Keith’s market to some extent as producers reduced their herds, but as Brownfield states, you have to “take it one day at a time.”
“Just like everybody who had their challenges with COVID and how to get around it—or through it, I should say—everybody was trying to work with it,” said Brownfield. “The rules just changed on everybody…but I had a great year.”
Despite a modest gain in farm real estate value per acre, Brownfield stated real estate in New Mexico is still a good value. According to the USDA’s Land Values 2020 Summary in August, farm real estate value per acre was $575, a 0.9 percent increase over 2019. Irrigated cropland experienced the most significant gain over 2019 levels, with average prices of $4,370 per acre, a 4 percent increase. Brownfield currently has a pecan orchard listed for sale with a new irrigated well on 51 acres. Dona Ana County, where Brownfield works, ranks No. 1 in the state for pecan acreage and fifth for the number of livestock, according to USDA’s Census of Agriculture in 2012.
According to landandfarm.com, “The combined value of all New Mexico land for sale is almost $3 billion and totals 2 million acres of New Mexico land for sale in the state (the second most in the country). The median price of New Mexico land and rural real estate for sale is $119,000. Of all the counties in New Mexico, Santa Fe County has the most land and rural real estate for sale.”
Brownfield doesn’t know what this year will hold for real estate but noted that people are always looking “and that leads to something else.”
“I’m glad I’ve got somewhat of an inventory whether it’s a bit of farmland, rangeland or a good ranch,” Brownfield said. “I sure hope the vaccine helps to continue what we had in 2020 for the real estate market. I hope it brings some confidence back into people’s lives and things back to normal, but I guess that is just a setting on a washing machine.”
Texas
Cole is a real estate broker and consultant dealing primarily with agricultural properties. He has been engaged in the ranch brokerage business since 1981 in Texas and New Mexico. He is also the owner/operator of C Bar Ranch in Schleicher County, raising purebred Charolais cattle. Cole and his sons also run commercial cattle in Presidio County, TX.
The majority of his listings and business are in West Texas around Marfa in Presidio County, Alpine in Brewster County, and southeast of San Angelo.
Cole told WLJ he had a successful 2020, particularly in the latter half of the year. There was little interest at the beginning of the year and other brokers were experiencing the same phenomena. After summer, there was a “somewhat healthy” interest in properties in the $2-5 million range and “very healthy” interest in the $2 million and under in West Texas and Hill Country. Cole speculated interest in Hill Country properties was due to “people looking to get out of the cities.”
Cole stated there was a smaller market with fewer buyers on properties with a higher price tag—such as the Petan Ranch in Presidio County currently listed for $43 million on over 44,000 acres—and tracts over 20,000 acres. However, the turnaround time for ranches of this size and price tag remains healthier than other regions, with properties selling in six months to a year.
Cole stated buyers were equal parts investors and people looking for outdoor recreational opportunities, including hunting, and ranchers who are relocating their operations.
According to USDA Land Values 2020 Summary, pastureland prices showed a continued increase in prices as of August. From 2019, prices have increased 1.2 percent in the state, averaging $1,680 per acre. Both irrigated and non-irrigated cropland in the state experienced the most significant jump, with prices rising an average of 5.2 percent from 2019.
Paul Schadegg, area sales manager for Farmers National Company, said for the Southwestern and Southern Plains areas, interest in real estate by investors has grown in the past year and demand “has definitely increased.” Schadegg said ranchland prices in the state are strong as demand grows.
“Despite the challenges faced by agriculture and producers in 2020, the land market remained stable throughout the year and strengthened for good cropland in the last quarter,” the company’s statement points out.
Generally speaking, Cole is cautiously optimistic about the first half of this year. While he is concerned about the potential tax changes, Cole is quick to point out real estate is “more stable than Wall Street” and a reliable place to have your money.
“January is a new month, and we’re up and going again and we see somewhat of an active market,” said Cole.
Arizona
Groseta is a third-generation rancher raised in the Verde Valley in north-central Arizona and specializes in agricultural, recreational, rural and transitional land. He is co-owner of Headquarters West, Ltd. and has been in the real estate business for 43 years.
The firm is the largest agricultural real estate firm in the state, with numerous listings throughout the state and in western New Mexico. The majority of Groseta’s listings are in Yavapai County surrounding Prescott and Cottonwood, AZ; and Cochise County, offering mixed-use, the potential for development, mineral rights, equine facilities and grazing opportunities.
While 1031 Exchanges were not the majority of sales for Groseta, COVID-19 was the catalyst for sales with people from out of state looking for an investment opportunity or wanting to move out of an urban area to get “more elbow room.”
“You usually can’t go wrong with investing in Arizona real estate,” said Groseta. “Arizona is such a desirable place to live and it has a good business climate resulting in a stronger ranch real estate market the past few years. So that’s been kind of the cycle and has gotten stronger the last few years.”
According to the USDA Land Values 2020 Summary, farm real estate value per acre increased 1.2 percent over 2019, averaging $3,850 per acre. Average prices have increased 8 percent since 2016, reflecting a healthy market.
Groseta echoed what Cole said regarding price point sales for the market. Demand for ranches in the $1-3.5 million range has been strong, and interest has not been as strong with ranches priced above $4 million. Demand has also been fueled by the reduction in deeded land based in Arizona and the growth of urban areas in the metro Phoenix area and around the Tucson area. Buyers want to own their piece of land coupled with the “romance of the West,” yet they still desire to be within driving distance of these areas and all the amenities they offer. Groseta states these types of properties command a higher price due to the adage “location, location, location.”
Farmers National Company stated in their released statement, “As a result of COVID-19, a growing number of individuals have become interested in land as an investment. An individual might be interested in a rural acreage so they can have a place outside an urban area, or it might be cropland if they want a safe, long-term investment.”
Ranches with exceptional improvements garner higher prices, and people interested in these properties must look at it as an investment opportunity and see if it pencils out, Groseta explains. He also notes with this hot real estate market, it makes it difficult for young people to get into the ranching business. Groseta voiced concern the drought is a big issue in the state. Ranchers are drastically reducing their herds due to not receiving monsoonal moisture during the summer of 2020 spring for warm-season grasses.
“We need summer rains to grow forage as Arizona has mostly warm-season perennial grasses,” said Groseta. “In the lower elevations, we need wet winters and springs to grow annuals and forbs on our desert ranches.”
Groseta also sees “snowbirds” who are retiring from colder parts of the country and wishing to retire with a few cows and “keep their money together.”
“What I’m trying to tell you and share with you is that Arizona is a popular place to live if you want the romance of owning a ranch in the West,” said Groseta. — Charles Wallace, WLJ editor
