One of the most valuable features of our webinars is the question and answer portion. Below, we’ve provided the 721 Exchange Q&A for your edification. Please bookmark this page for your convenience!
May 2025 Webinar
1. How do our options change if the farm is owned in an S Corporation?
A: Nothing changes other than the S corporation needs to do the exchange, or 453 or 721.
2. Would this section 721 allow for a way to get land out of a c-Corp?
A: Under certain scenarios, it may be possible to convert a C-Corp to an S-Corp after the 721 exchange. Whether this is possible is highly dependent of your specific facts and circumstances and it would be important to consult with your tax advisor to see if you would qualify.
3. How does 721 interact with state corporate farming laws?
A: Section 721 allows tax-deferred contributions of land to a partnership, but it does not override state corporate farming laws. If a partnership or LLC receiving the land violates state restrictions on corporate farmland ownership, the transaction may be legally invalid under state law even if it is tax-deferred federally. Always ensure compliance with state laws before proceeding.
4. If a corporation uses section 721 to contribute to a partnership, could it create a personal holding company issue?
A: The act of owning a limited partnership interest by itself does will not automatically establish that the C-Corp is a personal holding company, but income from a limited partnership would be considered PHC income for purposes of establishing whether a C-Corp is a personal holding company.
5. I am surprised with the chart showing so many acres and total numbers being family/privately held. What have been the trends over the last 10 or 15 years?
A: Over the past 10–15 years, most U.S. farmland has remained family- or privately owned, but there has been a steady trend toward fewer, larger farms and increased ownership by non-operating landlords and institutional investors. While families still dominate, consolidation and generational turnover are gradually changing the landscape.
6: Is the 721 Exchange only for partnerships and not LLCs?
A: A Section 721 exchange applies to contributions of property to any entity taxed as a partnership—this includes LLCs, as long as they are treated as partnerships for federal tax purposes.
7. How do you determine the value of the farm?
A: The value of the farm in a Section 721 exchange is based on its fair market value, typically determined by a professional appraisal using comparable sales, income potential, and land features. This value sets the basis for the partnership interest received.
8. Who manages the business side of 721 exchange?
A: The receiving partnership or LLC manages the business side of a 721 exchange, with support from legal and tax advisors to ensure proper valuation, documentation, and compliance.
9. Who farms the land?
A: In a 721 exchange, the partnership or LLC that receives the land typically leases it back to the original owner or hires a third-party operator to farm it. The original landowner may continue farming if structured that way.
10. How does converting a portion of the farmland or ranch to solar power impact the 1031 exchange, 453 exchange or the 721 exchange, as many famers here in upstate NY are moving from crop growing to leasing agreements with solar producers.
A: Leasing farmland to a solar company does not disqualify it from a Section 721 exchange, but it can affect the valuation and the type of income the partnership receives.
11. Once you contribute farmland into a partnership by way of Section 721, hold on to the property for ten or so years, can one partner execute a 1031 exchange with his/her partnership interest?
A: No, a partner cannot use a 1031 exchange to defer taxes on the sale of a partnership interest, even if the interest represents contributed farmland held for many years.
12. If one chooses this option, does title change? IF you want to buy the farm back later, is it a predetermined price or at FMV?
A: Yes, in Section 721 exchange, title to the property does change—it is transferred from the individual (or entity) to the partnership or LLC in exchange for a partnership interest. If purchasing the farm back later it will be at FMV.
13. Who is buying the property shares after the holding period? Is it the fund, or are you selling to others that may own shares?
A: In a 721 exchange, after the holding period, you are selling your partnership interest, not the property. The buyer could be the fund, another investor, or a new third party, depending on the fund’s structure and liquidity options.
14. You reference partnership, so a corporation would not qualify is that correct?
A: Correct — a corporation does not qualify for a Section 721 exchange. It only applies to contributions of property to an entity taxed as a partnership (e.g., a partnership or an LLC taxed as a partnership).
15. Is there a minimum size for the farm in acreage?
A: No, there is no size minimum in terms of acreage for a Section 721 exchange.
16. If I sell a property in trust, do I have to buy in the same trust? How long will it have to stay in that trust?
A: Yes, if you sell in a trust, you must buy in the same trust.
17. Are annual reports to owners of the 721 Legacy Fund?
A: Yes, annual reports are provided.
July 2024 Webinar
1. If a landowner contributes the farm into Legacy Farmland Fund and then passes away, in order for heirs to receive a step up, is the value of the Fund included in the decedent’s estate?
A. Yes, the value of shares is included in the decedent’s estate.
2. Will the Fund keep the land for a long enough period of time for the Contributor not to be subject to 704(c) gain specifically allocated to them?
A. As long as the Contributor is alive, they have the ability to prevent the Fund from selling the land, which in turn provides the power to ensure the 704C gain is not specifically allocated to them. The intent of the Fund is not to flip properties. The intent of the Fund is to hold land for the long term, to gain appreciation long term, and provide returns to investors. In the event of the premature or untimely death of the Contributor, the clock does not restart for the 704C gain, but this is definitely an area to for investors to review individually with tax advisors.
3. What is the distinction between Legacy Farmland Fund and holding land in a regular partnership, then making the 754 election upon death of the partner to achieve the step-up for the heirs?
A. Aside from the initial tax deferral on contribution, from a partnership taxation standpoint, there little difference between a regular partnership and this Fund. This Fund does not require a land sale to take advantage of the benefits, including tax deferment. It also has a key benefit of asset diversification.
4. What is the source of cash flow to shareholders?
A. All the farms that come into the Fund are leased out on a cash rent basis to a tenant. The cash flow for the shareholders is all rental income from all the assets in the Fund. This income, minus expenses, create the quarterly distributed income to the shareholders.
5. Is the attraction to this Fund vs. a standard partnership the ability to monetize?
A. Legacy Farmland Fund does allow unit holders to redeem or monetize their shares. This is in contrast to some other partnership arrangements that have less flexibility.
6. Are there restrictions on shares within the Fund to be able to contribute them to an IDGT or a SLAT?
A. Our belief is that there are no restrictions that would bar a shareowner from contributing shares to an IDGT or SLAT.
7. Can you compare a 721 Exchange to a land rental partnership that holds the land and produces rental income to the partners. What are some of the differences and advantages of the 721 exchange model?
A. One advantage is the certainty of the tax treatment. Also, the Contributor is entirely passive in this partnership. In a land rental partnership, depending on one’s involvement and one’s activity, the landowner may have an active role in the farm to receive income. If the landowner seeks passive income for other tax purposes, a 721 Exchange is ideal. In addition, the income received from the Legacy Farmland Fund is the result of diversification. The landowner receives wide diversification from all farms in the Fund from across the country.
8. Does the Farmland owner have to contribute the land to the Fund to receive exclusion on capital gain treatment? Or can the farmland owner sell their land and contribute the cash proceeds to the Fund and still receive exclusion of capital gain treatment, similar to a 1031 exchange? A. No, a landowner cannot sell land and then roll the proceeds into the Legacy Farmland Fun on a tax deferred basis. You could sell the land, then perform a 1031 Exchange into new land and then roll that land into the fund. The main idea of the Fund is the contribution of land, not cash. Anytime land is sold and then cash is contributed, that action is not considered a 1031 Exchange, anyway, thus disqualifying tax deferred treatment under 1031.
9. How is growing crop treated when land is contributed?
A. The Legacy Farmland Fund would perform a pro rata adjustment of the annual lease rate of the land, and give consideration of that upon contribution, but it’s not necessarily anything done with the actual growing of crop. This is something that could be negotiated. Legacy Farmland Fund does not take ownership of growing crops on contribution.
10. Is there a very structured process agreed upon to determine the FMV of the land when it goes into the Fund?
A. The Fund determines the fair market value by performing an analysis of what we can offer on the property in order to maintain a dividend back to shareholders. Our intent is always to hit the same price if the land were to sell on the open market.
11. Who is in charge of leasing the land when it is contributed to the Fund? If you have a family member that has been renting that land, do they have any protection on continuing to be able to rent that land?
A. Once the Land comes into the fund, it is professionally managed at the asset level by a professional farm management company. This action allows Contributors to truly become passive owners. And, yes, the contributing Landowner can select the tenant of the land as it comes into the Fund. This is one of the carve out rights we have created to help protect the farm’s legacy.
12. Does the Fund actively seek out solar leasing or other revenue opportunities for the land?
A. Yes, Legacy Farmland Fund evaluates the farm to seek to create further income opportunities, which include solar leases. We work in conjunction with the Contributor to determine their sensitivities and preferences with wind and solar production, and whether the main desire is for the land to be farmed in row crop production. The goal of the Fund is to maximize revenue opportunities back to the investors but we definitely work with the Contributor on these points.
13. What is the advantage of the fund over a REIT?
A. A REIT or in this case, an UPREIT, is similar to a 721 Exchange however a REIT/UPREIT has more restrictions then a contribution to the Legacy Farmland Fund and on how income is calculated.
14. What if the land is already owned in an LLC (not MO or Wy)?
A. The LLC can contribute the land into the Fund if that’s the only asset in the LLC. Likely, if this is taxed as a partnership or a sole proprietor, the LLC can be liquidated and titled in individual names or the LLC name. From a tax standpoint, whether land is owned in an LLC or not, will not affect the bottom line.
13. Is land the only component contributed to the Fund, or are improvements considered as well? If land only what happens to the improvements for the farmer?
A. Legacy Farmland Fund will consider accepting improvements on the land, though this situation has not yet arisen. However, we understand improvements such as grain bins, machine shops, equipment sheds, etc., do exist. The Fund, however, will not take in residential assets on the land. Residences would be parceled out.
14. Under current North Dakota laws, would North Dakota landowners be able to participate in this opportunity?
A. No, North Dakota laws currently prohibit Legacy’s 721 Exchange for farmland.
15. Are there any limitations to selling shares?
A. Yes, Legacy Farmland Fund typically requires shares to be held for the first three years.
16. If you build in the option for a family to purchase land out of the Fund, does it have to be at FMV or could they have the option to purchase it out of the fund at a discount?
A. One of the carve out rights that the Fund has provided in order to protect family legacies is the ability to repurchase the farm in the future. This repurchase does occur at fair market value at the time of the repurchase. Example: If the landowner contributed the land into the Fund in in year one, and a family members desires to buy back the farm in year seven, the repurchase price would be set at the fair market value in year seven.
17. Does the Fund provide a market in the Fund shares?
A. The Fund provides a market in that the Fund will redeem units after a Contributor has been in the fund for three years.
18. How are shares valued?
A. The value of the units is equal to the fair value of the farmland holdings plus working capital minus any debt outstanding. This figure, in total, is divided by the number of units outstanding to arrive at a per unit value. Farmland values are adjusted annually based on their appraised value.
19. Are you receiving dividends or partnership distributions? Also, are you receiving a K-1 from the fund?
A. Partners receive partnership distributions and will receive a K-1 annually.
20. Are the share values tied directly to the farmland that is contributed, or to all of the Fund’s farmland? 2) Is the income received from the Fund tied directly to the farmland that is contributed, or to all of the Fund’s farmland? 3) How is the income reported to the shareholders?
A. Share value is based on the entire net asset value the entire Fund aggregated across all the assets to go into the Fund. This is the same with the income received; the partnership distributions that received are from all assets in the Fund. One of the main benefits of the Fund is this ability to diversify one’s farmland ownership geographically and by crop type (albeit only row crops).
20. Is there any discount in value of land contributed.
A. No there is no discount, although typical closing costs are deducted from the asset value at contribution.
21. If improvements have been depreciated what would the tax implications of that be. Would capital gains be lost?
As improvements are contributed in, there is no gain at the time of contribution; if and when the assets and/or shares are sold there may exist some ordinary income. But, if the value of the improvements have decreased over time, the gain allocated to those improvements will become lower and lower, and eventually may disappear. Additionally, if the shareowner passes away while owning those shares, the gain on those improvements (the ordinary income so to speak) would disappear with the death of the of the taxpayer, the election under 754, and would step it up under what we call code section 743 B. In summary, if Fund shares were sold fairly quickly after contribution and the improvements were material, they may be some ordinary income to declare. But, if this is a long term hold eventually the ordinary income will convert to capital gains as the value of the improvements drop to near zero.
22. Will the fund buy shares from heirs if they want to sell, thereby providing a ready buyer for the land? (The idea being to avoid having to find a local buyer if none are available, which could be a benefit in some cases.)
A. Yes, the Fund will redeem units after three years.
23. Generally it seems that REIT’s try to kick out about a 5% to 6.5% ROI. What are you seeing in this fund over the past 5 year to the owners?
A. Distribution yield on leased farmland is significantly less than commercial real estate, generally around 2%. Overall farmland returns, inclusive of appreciation, are significantly more. We benchmark ourselves against the NCREIF Farmland Property Index for Annual Cropland (NCREIF | Farmland Property Index)
24. What are the fees associated with being a member of the fund?
A. The manager is entitled to a 50 bps asset management fee and an incentive distribution right, which is a share of distributions. Generally speaking, net returns (inclusive of the Legacy fee) over a ten year period are expected to be about 2% less than gross returns (exclusive of our fee).
25. Will the Fund accept land that already has a conservation easement on it?
A. Yes, the Fund can accept land with a conservation easement. The land will be valued based on its restricted use.
26. Is there a limit on the size of contribution? Also, is there a cap on the Fund size?
A. There is no cap on the Fund’s size and the Fund typically accepts farms with a fair market value of greater than $1 million. The Fund will evaluate farms of lesser value on a case by case basis.
27. Can the Contributor maintain hunting rights on the farmland?
A. Yes, carve out rights that the Legacy Farmland Fund consider important to protecting a farm’s legacy include the ability to use the land for hunting, fishing or family reunions.
