1031 Exchange in Iowa: Farmland Gain Deduction, Transfer Tax and DSTs

Iowa's capital gain deduction now covers farmland only, and the tests are strict

Starting with tax year 2023, Iowa's capital gain deduction under rule 701-302.87 excludes net capital gain only from the sale of real property used in a farming business and from certain livestock. The earlier deduction for other business real property ended with tax year 2022; installment sales of that kind that began before 2023 are still reported on Form IA 100B.

To qualify, the taxpayer must have held the farmland for at least ten years, with section 1223 tacking allowed, and materially participated in the farming business for the ten years immediately before the sale. A landlord renting on cash rent is not materially participating, a crop-share landlord qualifies only if subject to self-employment tax on the crop-share income and meeting one of the landlord participation tests, and managing CRP acres alone does not count.

Family sales are treated differently: when the buyer is a relative within the second degree or a lineal descendant, Form IA 100H skips the material participation schedule and goes straight to the property details. A retired farmer may also make a single lifetime election on Form IA 100G to exclude all qualifying farm real estate gains, giving up the farm tenancy income exclusion and the beginning farmer tax credit in return.

Form IA 100H asks how the land was acquired and offers a box for a like-kind exchange, so a farmer who exchanged into the parcel years ago can count the earlier parcel's holding period where federal tacking applies. The deduction lands on IA 1040 Schedule 1, and the Department reviews every claim.

A flat 3.8% on everything else, deferred by the exchange and never clawed back

Iowa's individual income tax is a single 3.8% rate for 2025 and 2026 under Senate File 2442, applied to Iowa taxable income that starts from federal taxable income. Iowa adopted rolling conformity for tax years beginning in 2023, so section 1031 applies exactly as it does federally and gain deferred in an exchange is deferred in Iowa without a separate election.

Iowa keeps no record of that deferred gain and has no statute reaching it when the replacement property sits in another state. A Des Moines investor who exchanges an apartment building into a DST holding Texas industrial property and later sells is taxed by Iowa then only if still an Iowa resident, with the IA 130 out-of-state credit offsetting whatever the property state charges.

Non-farm sellers get no Iowa discount by waiting: an apartment, retail or office gain is taxed at the full 3.8% whenever it is recognized, so the exchange itself is the only state-level deferral available to them.

The transfer tax is the grantor's, and the declaration of value flags entity buyers of farmland

Iowa Code chapter 428A taxes each deed at $0.80 for every $500, or fraction of $500, of consideration above the first $500, which works out to $1.60 per $1,000. The grantor is liable under section 428A.3, the county recorder must refuse to record until the tax is paid, and consideration includes any encumbrance the buyer assumes.

A declaration of value signed by a party or agent accompanies every taxable deed and is passed to the assessor for the sales-ratio study. When agricultural land is bought by a corporation, limited partnership, trust, alien or nonresident alien, the declaration must identify the buyer as such, and the Department of Revenue forwards that part to the Secretary of State under the reporting rules that reference chapter 9H.

An exchange changes none of this; the deed you give the buyer is taxed the same way. Exempt deeds include those between a family entity and its owners for no consideration other than shares under 428A.2(15) and transfers in a corporate or LLC reorganization under 428A.2(14), which can matter when an entity is unwound ahead of an exchange.

Odd-year reassessment, rollbacks and productivity-based farmland values

All Iowa real property is reassessed in odd-numbered years, so values set in 2025 drive the 2026 bills and the next general reassessment is 2027; a sale does not trigger a mid-cycle revaluation, though the declaration of value informs the assessor's next round. Residential, commercial and industrial property are valued at market value, and in each odd year the Department equalizes every assessing jurisdiction to within 5% of the 100% level.

Farmland is not valued on sales at all. It is assessed on productivity through a five-year average landlord crop-share income model using yields, prices and government programs less expenses, capitalized at 7% to produce a county productivity value per acre.

Taxable value is then reduced by the assessment limitation, or rollback, that the Department certifies each November 1; residential and agricultural limitations are set so statewide taxable value in each class grows no more than 3%, while commercial and industrial property receives the residential rollback on the first $150,000 of value and 90% above it. The buyer of your former rental steps into that structure and a DST investor leaves it.

Bonus depreciation funds: Iowa conforms for assets placed in service from 2021

Sellers comparing a bonus depreciation fund with a DST as their replacement vehicle should know that Iowa fully conforms to section 168(k) bonus depreciation for tax years that begin in 2021 or later. The IA 4562A addback survives only for assets placed in service before 2021, older section 179 elections above Iowa's former limits and personal-property like-kind exchanges reported on IA 8824 for 2018 and 2019.