RAISE A GLASS AND TOAST VINO AND TAX DEFERRAL OPPORTUNITIES
“Wine is sunlight, held together by water” —Galileo
“I cook with wine and sometimes I even add it to the food” —W.C. Field
People have enjoyed vineyards and wine for thousands of years. With demand increasing, prospective vintners are buying up vacant land and planting grapes. When sold, many of these vineyards are suitable properties for a 1031 exchange. The sale of a vineyard or winery may include several different types of real property that qualify for tax deferral in a 1031 exchange, including:
- The land associated with the vineyard itself;
- The facilities and outbuildings that are a part of the winemaking operations, including the caretaker’s house, wine tasting facility or other property used in the wine operations; and
- Water rights (if treated as a real property interest under local law).
VINEYARDS AND DEPRECIATION
Many of the components of a vineyard may be depreciated over 10 years using straight-line depreciation. Although this provides a nice tax advantage for the vineyard owner during the depreciation period, the depreciation creates a considerably higher tax liability at the time of sale. When the property is sold, depreciation is recaptured and taxed at a federal rate of 25% — a rate much higher than the current federal capital gain tax rate of 15% or 20%. When a vineyard owner adds this depreciation recapture tax to the applicable federal tax on the remaining gain, as well as state and local income taxes, they may end up with considerably less after-tax dollars than they expected. By contrast, through a 1031 exchange, the vineyard owner can dispose of the real property components of the vineyard and defer some or all of the capital gain and depreciation recapture taxes.
If the owners also have a residence on the wine property, the residence may qualify for exclusion of capital gain taxes under Section 121. This residence portion of the property sale is normally excluded from the portion of the sales price allocated to the exchange since Section 1031 only applies to property held for investment or used in a business.
In Vino Veritas!