Iowa 1031 Exchanges and DSTs: Farm Leases, Taxes, and Rental Property

By Jerry Baker

An Iowa 1031 exchange can defer gain when you replace qualifying investment or business real estate with other qualifying real estate. Planning also means reviewing Iowa taxes, farm leases, drainage costs, or rental housing duties before choosing the next investment. This guide explains how to compare direct ownership with a qualifying Delaware Statutory Trust, or DST, using the work and income you want from your property. [1]

Decide what should change after the sale

Selling a farm that has been in the family for years is different from selling an apartment building you bought for income. Both owners may want an exchange. Their reasons, records, and next steps can be quite different.

A farm owner might want fewer calls about tile repairs or tenant changes. An apartment owner might want to stop handling repairs while keeping some real estate income. Another investor may like direct ownership and simply want a property that is easier to run.

I would begin with the same three questions: What income do you need? What work do you want to keep doing? What money needs to remain available for personal expenses? Put those answers on paper before a replacement property's projected return takes over the discussion.

Then list what you own. Include land, buildings, leases, equipment, debt, and any agreements that affect a buyer. Identify who holds title and who reports the income. Bring the list to your tax and legal advisers. A familiar property can still have a complex ownership history.

Give the exchange its own calendar

Section 1031 generally covers real property held for investment or productive business use. It does not make every item in a farm or business sale exchange property. Equipment and livestock need separate tax analysis. A personal residence and property held mainly for sale do not satisfy the basic investment-use rule. [1]

For a usual delayed exchange, arrange a qualified intermediary before the sale closes. You generally have 45 days after the transfer to identify replacement property in writing. You must receive it within 180 days, or by your tax return's due date, including extensions, if earlier. Rules also restrict access to proceeds and govern how many properties you can identify. [2]

Work backward from these dates. Allow time for a lender, title company, insurer, property inspector, and your advisers. If a question requires records from another party, find out who has them now. “We will get that later” is less useful once the clock is running.

Use a second calendar for the property itself. A farm lease, a crop cycle, a rental inspection, and a proposed closing may each have separate dates. Putting them next to the exchange calendar helps reveal conflicts while there is still time to solve them.

Use the current Iowa income tax rules

Iowa's Department of Revenue confirms a 3.8% flat individual income tax rate for tax year 2026. That rate applies to taxable individual income. It is not a tax on the entire price of every real estate sale, and it does not answer whether a particular gain is deferred or deductible. [3]

Ask your CPA for a written comparison of a taxable sale and the exchange you are considering. The comparison should show the starting tax basis, expected gain, debt payoff, closing costs, and cash you would keep. Ask which figures are firm and which still need records.

That last question matters when an owner has made improvements over many years. A remembered purchase price is not the same as a supported tax basis. Pull past returns, depreciation records, and invoices before treating an early estimate as your final tax bill.

Keep the tax estimate separate from the investment review. A large possible tax deferral does not make an overpriced replacement a good purchase. I want to know both what the exchange might accomplish and what risks you would take to accomplish it.

Do not assume every Iowa farm sale has the same deduction

The state's 2025 IA 100 overview says most transactions beginning in 2023 no longer qualify for the former broad Iowa capital gain deduction. It identifies limited categories, including certain farm real estate sales, and separate treatment for qualifying installments from older sales. The applicable form and the sale's original date matter. Use the instructions for the tax year involved. [4]

Form IA 100H addresses qualifying farm real estate sales from January 1, 2023, onward. It asks about the buyer's relationship to the seller, holding period, and farming activity. Its instructions say a cash-rent landlord generally is not treated as materially participating just by renting land. A retired farmer considering a lifetime election is directed to a different form, IA 100G. [5]

These are reasons to ask specific questions, rather than rely on “farmland is exempt.” Did you farm the land yourself? Was it cash rented? Who owned it during the years in question? Was the sale to a relative? Did a prior sale or election affect the available options?

Consider two siblings who own separate parcels. One ran a farming business. The other received rental checks but took no role in farm work. Their land might look similar from the road, while the tax records describe different situations. Do not copy one sibling's answer onto the other's return.

The 2025 forms are useful evidence of the distinctions. They are not a substitute for checking the current filing year's law and instructions before acting. Have the CPA explain which facts support the claimed treatment and what still needs proof.

Include Iowa real estate transfer tax in the closing budget

The Department of Revenue lists Iowa's real estate transfer tax at 80 cents for each $500 increment of consideration, with the first $500 excepted. The tax is paid to the county recorder when the deed or other instrument is recorded. Have the closing team confirm the taxable amount, rounding, and any applicable exemption. [6]

For a simple illustration, assume exactly $1 million of consideration subject to that rule and no exemption. Subtracting the first $500 leaves $999,500. Dividing by $500 gives 1,999 increments. At 80 cents each, the tax is $1,599.20. Other recording and closing charges are separate.

Request a draft settlement statement early. Review each charge with the person responsible for it. Ask the intermediary and CPA how costs will be handled within the exchange, rather than treating every charge as an interchangeable reduction in proceeds.

The useful number is the amount actually available for the next step after the correct adjustments. A property's contract price alone does not tell you how much cash will reach the intermediary or what replacement structure you can afford.

Read farm rent surveys as context

Iowa State University's May 2026 report puts the statewide average cash rent for typical cropland at $270 per acre, down $1 from 2025. The survey asks about typical rents and reports county and land-quality differences. It does not establish the rent or value of an individual tract. [7]

Use that context to form questions. Which acres are actually rented? Are non-crop areas included in the quoted acreage? Does rent cover a building, storage area, or another right? Who pays for each recurring expense?

Ask for the signed lease and payment record. A seller's view of what a new tenant might pay is different from the rent a current tenant owes. If the asking price depends on a higher future rent, identify the steps needed to obtain it.

For your own comparison, place the proposed property's gross rent beside owner costs, reserves, and debt payments. Then compare the remaining cash with the equity required. Do not call gross rent a spendable return.

Also identify work that was never invoiced. Perhaps the current owner inspects drainage lines, arranges mowing, and meets contractors without charging the property. If you will hire someone for those tasks, include that expense. The ownership plan should reflect your time and resources.

Investigate what is beneath the field

Iowa State's drainage guidance explains that a drainage system needs a suitable outlet and a design suited to the site. It also recommends keeping accurate plans of installed lines for future upkeep. Its May 2023 edition remains a useful technical starting point; a property-specific engineer should assess the actual system and proposed work. [8]

Ask the seller for maps, installation records, repair bills, and known trouble spots. Walk through the records with the tenant. A line on an old sketch is a lead to investigate, not proof that the line still works or has enough capacity.

Find out which work belongs to the parcel and which depends on a shared system. Who can approve a repair? Who must give access? Which contractor understands the system? Where does the water go after it leaves the property?

Hardin County explains that drainage district assessments depend on the benefit a parcel receives or could receive. It says assessments arise as district funds are needed for work, rather than on one fixed schedule. This makes the district file and possible future projects part of a buyer's cost review. [9]

Request past assessments, current balances, and any proposed project notices. Ask how a known charge will be divided at closing. Avoid assuming that a low recent bill means the system will need little money during your ownership.

Suppose a buyer sets aside $12,000 for first-year property work, then learns of an $8,000 shared drainage charge and a $9,000 private repair. Those two items total $17,000, leaving a $5,000 gap in that reserve. These are hypothetical figures. The point is to test the full work plan before settling on an income target.

Check farm tenant rights before promising possession

Iowa Code chapter 562 generally continues a farm tenancy into the next crop year unless proper termination notice is served. This can apply despite an agreed lease end date. The law generally ties termination to March 1, with exceptions. Notice methods have exact timing rules: some require service on or before September 1, while the certified-mail provision says before September 1. Have counsel handle the applicable method and proof. [10]

Do not borrow a neighbor's lease rule from another state. Do not assume that a small acreage or a written end date settles the matter. Give the full lease and any notices to an Iowa attorney.

A buyer who wants a new operator should ask when that change can lawfully occur. Compare that date with the purchase agreement and the first year's income model. A closing date and a possession date need not mean the same thing.

For a seller, start this work before making promises in the listing or contract. Ask the tenant about improvements, repairs, prepaid amounts, and other agreements. Record what will carry forward and what the parties plan to resolve at closing.

For housing, check deposits and the correct city's rules

Iowa's residential rental law generally caps a rental deposit at two months' rent. It requires return or a statement of authorized withholding within 30 days after both tenancy termination and receipt of the tenant's mailing address or delivery instructions. The statute also addresses deposit handling when ownership changes. Have counsel review the full duties for the transaction. [11]

For an apartment purchase, reconcile deposits unit by unit. Compare each lease, the tenant ledger, and the money transferred at closing. Ask whether recent departures have pending deposit claims. A single balance on a statement does not show which tenant owns each amount.

Local requirements need their own review. West Des Moines says its rental housing program requires licensing and inspections every two years. Its certificate process includes payment of fees and completion of required repairs. That is a West Des Moines program, not a rule to assume applies unchanged across Iowa. [12]

Request the current certificate, last inspection report, open notices, and repair records. Confirm the parcel's actual jurisdiction. A marketing description such as “Des Moines area” does not identify the office that oversees the building.

Then test the owner's budget against the building's condition. If required work is missing from the seller's expenses, add it. Ask who will manage that work and whether units must be vacant during repairs. The property may still be worth considering, but the first year's cash plan must account for it.

Compare a direct property with a DST

IRS Revenue Ruling 2004-86 describes a trust structure in which a DST interest can qualify as an interest in real property for a 1031 exchange. The ruling depends on facts and limits on the trustee's powers. Have the particular offering's structure and tax analysis reviewed; the DST label alone does not establish eligibility. [13]

A sponsor-managed investment changes the decisions you make. Instead of choosing a tile contractor or managing tenant repairs, you review the manager, properties, financing, fees, and business plan before investing. Decide whether that change in responsibility fits what you want.

Private placements can be illiquid, provide limited information, and result in a complete loss. A projected distribution or planned sale date is not a promise. Keep money needed for foreseeable personal expenses outside an investment you may be unable to sell. [14]

Compare both paths using the same questions. What cash might reach you after costs? Who decides what happens when expenses rise? How much control will you have? What could delay a sale? What assumptions must hold for the plan to work?

I would write down the strongest reason for each option and the biggest concern. If the main benefit of selling is less work, make sure the replacement actually supports that goal. If keeping control matters more, be honest about the work and reserve money that come with it.

Iowa 1031 exchange and DST FAQs

Can Iowa farmland be exchanged for apartments or another property type?

Qualifying real estate generally can be exchanged for other qualifying real estate even when the use differs. Both properties and the exchange must meet federal rules. Separate equipment, livestock, and personal-use property from the real estate analysis. [1]

What is Iowa's individual income tax rate for 2026?

The state confirms a flat 3.8% rate on taxable individual income for 2026. Apply it to the correct tax base. The sale price, recognized gain, and taxable income are different figures. [3]

Does owning an Iowa farm guarantee a capital gain deduction?

No. The state limits eligible transactions and requires the applicable IA 100 form. The sale date and other facts matter. Have your CPA check the filing year's instructions and your records before claiming the deduction. [4]

Can I change the farm tenant immediately after buying?

Do not assume so. Iowa's farm tenancy rules can continue the lease into the next crop year. Have an Iowa attorney review the agreement, notice method, timing, and any exception before promising possession. [10]

Does the statewide cash rent survey tell me my farm's return?

No. It reports typical rent information, with differences by county and land quality. Your return depends on the actual rent, price, owner costs, financing, and other property facts. The survey is a comparison tool, not an appraisal or income guarantee. [7]

Would a DST let me sell my investment whenever I need cash?

You should not plan on that. Private investments can have substantial resale limits and long holding periods. Read the offering documents and consider your cash needs before investing. An exchange strategy should not rely on a quick exit that the investment does not provide. [14]

Educational information, not an offer or a personal tax, legal, or investment recommendation. Examples are hypothetical and omit stated adjustments. Tax treatment depends on your facts and current law. Review your transaction with your CPA, attorney, and qualified intermediary. Real estate investments can lose value and may be illiquid.