Can I 1031 land enrolled in CRP?

CRP enrollment does not change the land's eligibility for an exchange

Section 1031(a)(1) requires real property held for productive use in a trade or business or for investment. Land under a conservation contract is still land, and Reg. section 1.1031(a)-1(b) says even unproductive real estate held for future use or appreciation is held for investment.

IRS Publication 225 describes CRP as a long-term USDA contract to convert highly erodible or other specified cropland to a less intensive use, in exchange for annual payments. Whether you treat those acres as part of your farm business or as an investment, they meet the holding test.

The replacement can be any U.S. real property held for business or investment, from more farmland to apartments, as covered in farmland into an apartment building.

The contract follows the land only if the buyer agrees to take it on

Under 7 CFR 1410.51(a), a new owner who acquires CRP land may be approved by the agency as a participant to a new contract for those acres and must assume all obligations of the previous participant's contract. That means keeping the cover in place and following the conservation plan for the rest of the term.

If the buyer does not become a successor within 60 days, or another period the agency sets, section 1410.51(d) terminates the contract on the affected acres. The original participant then forfeits future payments and must refund all previous payments received under the contract, plus interest and liquidated damages, unless the agency agrees otherwise.

Payments for the fiscal year of the transfer are divided between the old and new participant as section 1410.51(c) and section 1410.42 provide, by agreement approved by the agency or, failing that, as it decides.

Worked example: the refund risk is a price term, not a tax term

Hypothetical, round numbers; run your own numbers with your CPA. You own 160 acres worth $800,000 with a $200,000 basis, enrolled in CRP with four years left, and you have received $40,000 in annual payments under the current contract. A buyer wants to plant row crops as soon as possible.

If the buyer refuses to succeed to the contract, you owe back the $40,000 plus interest and liquidated damages after closing, which can wipe out a meaningful part of the price advantage. A buyer who will take the contract, or a lower price with the refund risk shifted, may net you more.

Either way the exchange works the same. The $600,000 gain is deferred if you reinvest at least the net sale price in replacement real estate, and any refund you pay is a cost to work through with your CPA rather than part of the exchange.

• Sale price: $800,000; basis $200,000; gain $600,000 deferrable.
• Refund exposure if no successor: $40,000 plus interest and liquidated damages.
• Contract term: put the successor requirement in the purchase agreement.

Tax treatment of the payments does not change, and neither does the exchange

Publication 225 says CRP payments are reported to you on Form 1099-G and that annual payments and any one-time incentive payment go on Schedule F. It also notes that individuals receiving Social Security retirement or disability benefits may exclude CRP payments when figuring self-employment tax, which section 1402(a)(1) writes into the definition of self-employment income.

Selling the land ends your share of future payments but does not convert past payments into sale proceeds. Keep the payment history, because the buyer, the agency and your CPA will all need it.

Whether cash rent, crop share or conservation payments make the land investment or business property does not affect eligibility; both qualify, as covered in whether cash-renting counts as investment use.

What to do before listing CRP acres, and where a DST fits

Get a copy of the contract from your local Farm Service Agency office, note the expiration date and any practice obligations, and decide whether you want a buyer who will succeed or will price the refund risk. Then write that choice into the contract with a deadline that matches the 60-day rule.

Do not let the CRP payment split run through the exchange funds. If the parties settle the current-year payment on the closing statement, treat it like any proration, as explained in security deposits and prorations.

Landowners who want income without managing land can exchange into Delaware statutory trust interests, which Rev. Rul. 2004-86 treats as acquirable in a 1031 exchange. See traditional DSTs and the farmland property page.