The Emergence of Pore Space as a Property Right
Pore space, although rarely thought about, should be viewed as just another private property right. Pore space is generally thought of as a subsurface property right. Although it can be defined in a number of different ways, pore space, by its simplest definition, is the empty space between grains of rock, fractures, and voids.
Until very recently, pore space was hardly considered a property right at all. However, the surge of interest in carbon capture and sequestration (CCS), as well as the need to store salt water produced by the oil and gas industry—as a waste product arising from oil and gas production and from hydraulic fracturing—has made pore space ownership an increasingly popular, yet extremely underdeveloped area of the law.
Like most property rights, pore space ownership has evolved out of common law property rights, which are traceable to the old common law maxim known as the “ad coelum doctrine.” The ad coelum doctrine states “cujus est solum, ejus est usque ad coelum et ad inferos,” meaning “to whomever the soil belongs, he owns also to the sky and to the depths.” Taken literally, the owner of the surface holds title to the entire tract from the heavens to the depths of the earth. This form of ownership, although no longer as broad as it was originally, is the simplest and broadest property interest allowed by law, which is known as a fee simple interest. Determining ownership of pore space is very straightforward when a fee simple interest is involved because the fee owner holds title to both the surface estate and the mineral estate. However, once the fee simple interest is severed into differing estates and burdened with a variety of other property interests, determining pore space ownership can become a confusing and complicated issue.
There are two common ownership structures once the mineral estate has been severed from the surface estate: (1) the non-ownership theory, known as the “English Rule”; and (2) the ownership in place theory, known as the “American Rule.”
Application of the English Rule vests pore space ownership with the mineral estate—which is clearly the current minority rule within the United States.
The American Rule, on the other hand, “involves the severance of a mineral right from the interest in the whole geological formation.” When applying the American Rule, the mineral estate owns the minerals beneath the land, but the geological formation, is owned by the surface estate. The American Rule is currently the majority rule in the United States.
In addition, although the American Rule vests pore space ownership with surface estate, the mineral estate still has the right to explore and remove minerals from the land, which allows a mineral estate the right of reasonable use of pore space for mineral exploration. As a result, in states applying the American Rule, it cannot simply be said that pore space belongs solely to the surface estate. It must also be determined if the reservoir has been depleted of minerals because until depletion occurs, the mineral estate still has a right to use the pore space.
We researched pore space law in Arkansas, Colorado, Kansas, Kentucky, Montana, New Mexico, North Dakota, Oklahoma, Pennsylvania, Texas, Wyoming, Michigan, Louisiana, New York, and West Virginia to determine if there is a trend towards vesting ownership of pore space with the surface or mineral estate. Six of the states were undecided, four states have a clear statute vesting ownership with the surface estate, four other states have case law supporting surface estate ownership, and one state had a case arguing pore space could be owned by the mineral estate.
As such, landowners should be mindful of the following legal and practical considerations associated with their pore space rights. Landowners, and those representing them, must be cognizant of how title to pore space can be modified through various contracts, easements, litigation, releases, and other agreements landowners routinely enter into.
Legal and Practical Considerations of Pore Space Rights
Valuation of Pore Space
As surface owners become more educated about pore space ownership and as technology advances, it is highly likely that operators will need to acquire rights to the pore space in order to engage in directional drilling or inject wastewater in areas outside of the drilling units. Yet, placing a monetary value on pore space can be just as complicated as determining ownership. For instance, valuation of pore space will likely be difficult to determine as it will depend on the particular use and what the user is willing to pay as opposed to the actual value of occupation.
As previously mentioned, pore space can be used for carbon capture and sequestration (CCS). CCS can potentially remove eighty to ninety-five percent of the CO2 emitted from power plants. Studies have also indicated that global sequestration capacity in depleted oil and gas fields is substantial, with the capacity to store 125 years of current worldwide CO2 emissions from fossil fuel fired power plants. Although CO2 is routinely injected into subsurface pore space in an effort to aid in the recovery of oil and gas, and though large-scale sequestration sites have been identified within the United States, there are currently no large-scale, commercial sequestration projects underway in the United States. Still, pore space owners should be mindful of the opportunity and their right to use depleted oil and gas reservoirs for CO2 sequestration.
Underground Natural Gas Storage
In addition to CO2 sequestration, pore space also has the potential to be used for underground natural gas storage. Natural gas, unlike oil, is more easily stored by re-injection into underground rock pore spaces, which are typically geological formations or common sources of supply whose pore spaces formerly held producible hydrocarbons that are now substantially depleted. In some states, surface owners retain the right to depleted geological formations and; therefore, should request compensation for storage of natural gas in depleted geological formations, and for injection of wastewater produced from out of section wells.
In additional to potential uses for pore space, pore space owners should be aware of the high potential of a subsurface trespass.
Traditional Oil and Gas Subsurface Trespass
The most obvious example of an actionable trespass in this context is a directional well that bottoms out under neighboring property. This situation gives rise to an actionable trespass due to the well-established principle of property law that prevents the use of the surface to support mineral extraction activities on other lands. However, operators can avoid a trespass situation by seeking an appropriate release from the pore space owner.
A subsurface trespass can also occur during hydraulic fracturing. However, courts tend to rule that an injury must occur in connection with the subsurface trespass as hydraulic fracturing prevents underground waste of hydrocarbons by allowing its recovery from tight reservoirs that would not otherwise be productive and thus, meets an important social need. Although this reasoning wisely protects the well-established and necessary practice of hydraulic fracturing, it also gives an inference that courts may be reluctant to find a subsurface trespass of pore space as a result of hydraulic fracturing.
Secondary and Enhanced Recovery Operations
Secondary or enhanced recovery operations are used to maintain or increase production of a well once the reservoir’s natural production decreases. Although states often recognize secondary or enhanced recovery as a valid public interest, trespass issues can arise in instances when an operator injects a substance, such as salt water, carbon dioxide, chemicals, or natural gas, into the subsurface of its own property in order to increase production and the injected substance invades the subsurface of the neighboring property.
Generally, when secondary recovery is involved, it appears that most courts are unwilling to find the migration of wastewater onto neighboring properties to be a trespass. This is likely because secondary recovery is in the best interest of the public and industry. With that said, there appears to be no clear case law challenging this logic specifically in the realm of pore space.
Wastewater Injection Wells
Wastewater injection wells can be associated with subsurface trespasses. In this situation, a subsurface trespass occurs when fluids from a wastewater injection well migrate beyond the legal surface boundaries of operator’s rights. It is likely that the operation of many wastewater injection wells result in the subsurface trespass of pore space to some extent, as common sense says that when a commercial wastewater disposal operator only owns one acre yet injects hundreds of thousands of barrels of wastewater into a wellbore on that one acre, the wastewater is migrating to an area outside of that one acre. However, that being said, it would be difficult to prove. Nevertheless, pore space owners should always be mindful of wastewater injection wells near their property and the potential for that wastewater to migrate onto their property. As the law on pore space develops, surface owners may seek compensation from these commercial wastewater disposal operators or may even try to prohibit the injection.
Evaluating pore space as an underground property right should be considered in every land deal. The development of pore space as a valuable property right is an increasing area of consideration for REALTORS®, title examiners, landmen, policymakers, attorneys, and judges. As such, it will be increasingly important to consider the implications every deal may have on this emerging area of the law.
For a more in-depth analysis of pore space, you can download a copy of the 2015 thesis and other writings on the topic by visiting www.LandownerFirm.com.
This article originally appeared in the 2017 Winter Terra Firma Magazine, the official publication of the REALTORS® Land Institute.
About the author: Trae Gray is a Mediator, Entrepreneur, Lawyer, Speaker, and Expert Witness with specialized expertise in ethics and natural resources. With a nationwide practice he is listed by Super Lawyers and The Top Trial Lawyers in America as a Lifetime Member of the Multi-Million Dollar Advocates Forum – something that is achieved by less than 1% of U.S. lawyers. More can be found online at TraeGray.com.
About the author: Ryan Ellis, a partner with LandownerFirm, is a legal research and writing specialist with specialized expertise in Class Action, Environmental, Energy, and Natural Resource legal matters. She graduated with honors from the University of Tulsa College of Law where she completed the Sustainable Energy and Resources Law Program, which offers one of the most advanced energy, environmental, and natural resource legal educations in the nation. More can be found online at LandownerFirm.com.
This piece was originally featured in LAND Magazine.
Driving down a Texas highway north of the Dallas Fort Worth metroplex, you see one horse ranch after another. Visitor’s think, “I Wonder why all these horse ranches are here?” The equine enthusiast thinks, “Man I wish I could live here!” The equine industry has exploded in the North Texas corridor traveling north on Highway 377 leading out of the D-FW metroplex from Aubrey to Whitesboro. It is a constant draw for all aspects of the equine industry. There are days the trucks and trailers outnumber the cars, from the normal bustle of horsemen and horsewomen hauling their horses to a trainer, a vet, another farm, to a lesson, delivering a sale horse, buying a horse, riding with a friend, going trail riding, moving mares to another farm, competitions and even the traditional life of just going to check and gather cattle.
North Texas and southern Oklahoma have become popular locations for the equine industry. For years Aubrey and Pilot Point Texas were considered one of the most highly esteemed equine areas in the United States. At that time the growth of horse ranches was moving north up the Highway 377 corridor. Now the entire corridor from Aubrey to Whitesboro is populated with horse ranches. This attraction has been going on for some time. “What is it that attracts the horsemen?” you ask. The three main draws of the area for the equine community are sandy loam soil, climate and proximity.
Sandy Loam soil is a must if you are a horseman moving to Texas. If a person isn’t knowledgeable about soil they can be fooled by location. The Sandy Loam Corridor is only thirty miles wide and runs from the Red River in Cooke and Grayson Counties, south two-hundred miles. The eastern boundary of the sandy loam soil is just a few miles east of Highway 377 and can turn to black land very quickly. The black land is good for farming but most horsemen don’t care for it and will insist on the sandy loam. The sandy loam has such great density and base that after heavy rains the soil will dry quickly. The density and base of the sandy loam soil is what makes it so incredible for footing in a riding arena and also a great composition for growing Coastal Bermuda grass. Coastal Bermuda grows best in sandy loam as it is drought tolerant and can handle heavy grazing and close defoliation. It is also the most economical forage to feed as it is readily available and the next step up in protein value is alfalfa which nearly triples in price.
Climate is another reason so many equine enthusiasts have moved to Texas. They come from all over the United States, possibly where winters are harsh and harder to keep horses trained and ready for competition. Winter in North Texas is inviting with average high temperatures in the fifties and average low temperatures in the thirties. However, there is that occasional snowfall or ice storm that will bring us to a standstill; but, never fear, the sun generally comes out and temperatures rise again in a timely manner.
Location! Location! Location! Many of the largest equine breed shows and specialized events, not to mention race tracks, are located in Fort Worth, Oklahoma City, Tulsa and surrounding areas. All of these cities are a reasonable driving distance from North Texas and on any given weekend you will find breed shows, reining, cutting, halter, working hunter, barrel racing, roping, cowhorse, mounted shooting, team roping, rodeo, racing and ranch horse versatility events at one or all of these outstanding facilities. The proximity makes it an easy day trip to spectate or compete! In November and December these facilities hold some of the most prestigious events in the Western Equine industry hosting the American Quarter Horse World Show, American Paint Horse World Show, Appaloosa World Shows, National Reining Horse Futurity, National Cutting Horse Futurity and the National Barrel Horse Futurity. That is two full months of outstanding competition from the best in the industry.
During the fall, in these major events, you will find that the international presence is overwhelming. Nationals from Japan, Brazil, Australia, all of Europe and more will travel to the Dallas-Fort Worth area to spectate and also make purchases, both from the equine and retail side of the industry.
The Dallas/Fort Worth International Airport is within seventy miles and an easy drive for those flying in or out of North Texas. Equine buyers, both international and domestic, will fly to Texas to look for their next great prospect or show horse. The horse population in North Texas is unsurpassed. A serious buyer can leave the D/FW airport and drive in a one-hundred-mile radius and access Weatherford, Gainesville, Whitesboro, Tioga, Pilot Point, Aubrey, Denton — and all points in between — to view all the horses that they want in a day!
The breeding business is one entity of the equine industry that keeps traffic flowing. Each breed and discipline are well represented by world-class stallions and producing mares. The pedigrees and records from the breeding progeny are exceptional. Outstanding breeding derives prospects that are of the highest quality for sale and creates even more traffic. Equine breeding and training entities go hand-in-hand as many of the popular stallions and mares are still being shown successfully. With the modern-day technology of embryo transfer, mares can continue to be successfully shown and have recipient mares carry their embryos, which is a very big business in the area.
Horse trainers in Texas are considered to be some of the best in the world. Enter any given barn and find numerous trophies and buckles on display for World Champions, Futurity Champions, Derby Champions, National Finals Rodeo Champions, and the list goes on. The combination of horse trainers and North Texas’ amenities draw owners along with Non Pro, Youth and Amateur competitors, from afar to be a part of the equine community.
The reasons for wanting to be — and the types of people who want to be — part of this area are endless. Horse trainers who move to the area from other states will also have a following from their customers who will also make the move and buy property. Many horse owners are retirees who still have horses to compete or breed with. People who work from home will relocate to get closer to a trainer or the community. Many will purchase a second home for a place to stay when they come to ride with their trainers.
The equine industry is paramount to economic development in so many ways that have been unrecognized by society. Along with successful equine industry you have the supporting services that makes the industry successful, including but not limited to farriers, veterinarians, feed companies, tack stores, clothing stores, truck and trailer sales, and of course Realtors!
Another reason that people covet the North Texas area is the sense of community and fellowship. There is nothing like being able to share your love of horses and the sport with your neighbors and friends who appreciate and understand the industry. Many times your neighbor may have an interest in a different equine discipline since the equine industry is so vast. However, it’s the camaraderie that makes it fun to “cheer” for your neighbor. Horsemen stick together through thick and thin, win or lose. It’s knowing that if you need help your neighbor is there to help and they know horses. It’s the cowboy way of life!
I moved to Whitesboro, Texas nineteen years ago as a professional in the equine industry. I worked at a ranch as a trainer, breeding manager and ranch manager. I love the equine industry and I am still active as a professional judge for the American Quarter Horse Association, American Paint Horse Association, National Reining Horse Association and the National Snaffle Bit Association, along with being a Professional Horseman with AQHA.
I have been a REALTOR®, with Ebby Halliday REALTORS®, for the past nine years and work primarily Farm and Ranch sales. I have my own horses that I raise and show and enjoy them immensely. I will always be a part of the Equine industry that I love as a horseman and a REALTOR®. They go hand-in-hand for me today. Peers from the equine industry respect me for my knowledge in real estate. My experience has helped me become an expert in farm and ranch real estate as I understand the function of land and structures that horsemen are looking for. My true passion is ranch real estate with a hint of equine.
As my brother-in-law, who is a native Texan, says, “She wasn’t born here but she got here as fast as she could!”
Author bio: Lisa Moden is a prestigious Accredited Land Consultant of the REALTORS® Land Institute and has been a Broker for Ebby Halliday REALTORS® for over nine years. Lisa’s experience and passion for equine has helped her become an expert in farm and ranch real estate. In addition to farm and ranch, she also specializes in lake properties and investment land.
What do the following have in common?
- Pumpkin patch
- Crop maze
- Farm store
- Petting zoo
- Wedding barn
- Dairy with ice cream and cheese
- Pastured pork farm
- U-pick apple orchard
They are all types of agritourism activities and locations.
No matter what you call it – agritourism, agri-tourism, agrotourism, agritainment – it is cool! More than half of all U.S. states have some type of agritourism language written into their respective state laws. So what does this mean for you and your client? Knowing about the agritourism trends and practices around the country can not only assist you in finding the appropriate land for your clients, but can help your clients find future business opportunities. This follows the “growth begets growth” theory.
What is the difference between agritourism and ecotourism? It depends on the location and governing entity. Confused yet? No need to be. The bottom line is that knowing what is applicable within your sales region will help you help your clients, which in turn helps your bottom line.
To be successful, agritourism operators must follow best management practices on their farms, but also must be welcoming to consumers and offer activities that pique their interest. Seasonality comes into play for all operations, with some farms offering multiple attractions year-round, and some farms offering only one or two options in a short amount of time.
An example of the former could be a dairy farm that produces value-added products for sale on the property year-round. Farm visitors can view cows and calves, see a milking parlor, walk through the processing plant, and end up in a store where they can sample and purchase farm-fresh ice cream, cheese, and other products.
An example of the latter could be a Christmas tree farm. The size of the land to grow trees is of foremost importance since the farm may only be open to the public six to eight weeks a year. However, the farmer may decide to be open for events during other seasons (e.g. pumpkin patches and corn maze “haunts” in the fall, u-pick hydroponic fruit and vegetables in the spring, or pick your own flowers in the summer).
In both of these examples, the land size matters. Having a workable space for the farmer is critical to the operation. However, having a safe place for agritourists is also critical. REALTORS can help farmers determine how much land is needed to conduct both public and private business, and can assist in finding the most usable, arable, visitor-friendly space possible.
In the Christmas tree farm example, space is needed to grow the trees, to prepare the trees for purchase (cut, shake, wrap, load), for customer parking, for tree and other product sales. For this type of operation, when parking is needed, usually LOTS of land is needed to accommodate the customers. If the farmer decides to provide other agritourism activities throughout the year, the acreage needed for those activities must also be considered. These are all things to consider when looking at property before purchase.
Again, depending on the governing entity, what one state considers agritourism may be considered ecotourism by another. This may or may not matter to your client depending on what they want to offer, but the distinction is important in terms of liability protections for one category over another.
Ecotourism can be any outdoor activity that doesn’t need to be consistent with a farm. It CAN be, but doesn’t need to be. These include kayaking, ATV tours, skeet shooting, zip lining, hiking, and many others. Your clients may want to provide these opportunities for their existing or potential customers, and the land specifications are as important for them as if they were considering offering agritourism. Where you can add value for your clients is by knowing the difference, especially in terms of statutory and legal definitions.
The possibilities for agritourism opportunities are numerous and exciting for REALTORS®, clients, and consumers. Getting people to experience the outdoors and hearken back on America’s agrarian history is a way to tie us back to the land. By navigating the nuances of agritourism policy and how that can shape a client’s business future, a REALTOR has the ability to help clients achieve their dreams. How many people can state that?
I encourage you to take a look at what agritourism operations exist in your nearby communities. If you get a chance, stop by to see the possibilities for how your clients can take advantage of this emerging trend. And don’t even get me started on the exciting trend of agrihoods …
About the Author: Melissa Hunt is the Chairman of the National Agritourism Professionals Association. Learn more from Hunt on this topic at the 2017 National Land Conference in her presentation on Is Agritourism a Viable Option (For You or Your Client)?
This piece was originally featured in the 2016 Winter Terra Firma Magazine
When people hear the term “optimization” they often think of search engine optimization (SEO), but it is so much more than that. Optimizing your website is all about making your website as effective as possible to help reach your business objectives.
When land and ranch brokers ask me to help them optimize their website, there are two fundamentals I hit hard before even talking about search engine strategies. First, ensure you build value into the experience your audience has while they are browsing your site. Second, ensure you build value into the properties your audience is coming to your site to explore. Brokers work very hard to build value into their business through the expertise they deliver, the trustworthy relationships they build, and the solutions they provide, but they don’t always understand how to extend that value through their website. Your website is the single most important tool to represent you online. Ensuring you have the basics in place will go a long way towards extending the same value online as you do, so naturally, in person. So, to build value into the actual audience experience, start by asking yourself these key questions.
- When you click on your home page, does it look like you? Your website should be consistent with all of your branding. Your logo, your color scheme and your content should all represent your company. You want people to recognize your name, your signs, your email signature, and your business card. It doesn’t cost any more to make them all match, and it helps people get to know and trust your brand.
- Is all of your property information up to date? There is nothing worse than having a potential client request information and having to tell them the website details are outdated. Your website technology and approaches should make the update process quick and easy so you never have a problem in this area. You can even eliminate the need to update your land and ranch properties on your own site by choosing a website provider like us who partners with Lands of America to completely automate that process. The key here is that providing consistent and accurate information builds trust with your prospects and clients, while providing outdated information breaks trust.
- Is your website easy to use? You want your audience to find what they are looking for quickly and easily. They do not want to be forced to view advertisements, fill out a form, click through multiple pages, or create complicated searches to find what they need. Take them where they want to go immediately, and ensure your phone number is visible from every single page of your website. You want to make it easy for them to call you when they are ready.
- Is your website mobile-friendly? As of 2014, there are more mobile users than desktop users, but many companies still have not updated their technology to make the experience a good one for smart phone users. The “pinch and zoom” method results in text that is too small to read, links that are too close together, and pictures that don’t fit the screen. This frustrates prospects and clients coming to your website to view property details and request information. Make sure your site is truly mobile-friendly.
Once you’ve built value into the audience’s website experience, the next fundamental area of focus should be building value into the properties your audience is coming to your site to explore. There are a number of things you can do to set yourself apart from the competition and draw more clients, especially sellers.
- Use only high quality photography. Do not settle for small, grainy, or even blurry photography on your website. It is a disservice to your company, your clients and often detracts from the property value. If you choose not to hire a professional photographer (which is preferred), at the very least make sure you use the highest possible quality setting on your camera. Many people take short cuts with high quality photography because it costs more and many website providers can’t accommodate it. Choose a website provider who can.
- Create property and agency profile films. When I say film, I don’t mean just posting a virtual tour or raw aerial footage taken from your new drone. I mean using video to tell an engaging story about your agency and properties that capture and maintains your audience’s attention.
- Use a high quality mapping service. I recommend moving beyond Google mapping of pins and boundary markers to a monthly service. One that drives value into your properties by letting you mark and label property assets such as wells, structures, roads, and other unique features that set your property apart. One that has no limits to the number of boundary markers you can map and, then, easily share all of the mapping details via email. Some even have apps you can use while standing on the property, whether to create the asset details or show a prospect through a mobile device on the spot.
Once you have invested in the online fundamentals above, it is appropriate to start investing in driving more people to your website. You are well positioned to convert those leads to sales, positioning for a better return on your investment.
- Include your website address on all advertising and social media. You may chuckle at this one, but you’d be surprised how many people over look this critical opportunity. Whether it’s on your listings, in a trade journal, on social media, or in the home town paper, prominently (and proudly!) display your website address. One caution, if you do not intend to manage and maintain your social media sites, do not create them. Neglecting updates to your social media can create negative results. Social media sites are an extension of your business and you must have someone manning the desk to build trust.
- Provide regular email communication with your clients. Everyone knows the best leads come from client referrals. Staying in front of your clients with valuable information is very important. Ensure you have a database of clients willing to receive emails from you and reach out to them regularly with new properties, updated property information, highlights of sold properties, or something engaging, like a link to your agency profile film on your website. (Use your website as a convenient place to opt in or out of such mailings.) Ask for referrals and always include your website address in your email signature.
- Invest appropriately in SEO and internet marketing. I say “appropriately” because it can cost quite a bit to get your company to rank within the top three spots of an internet search page. Your company, broker, and agent names should be built into your website pages to generate free, top search engine placement, but beyond that, you should anticipate spending a minimum of $3,000 – $6,000 per year for a good internet marketing campaign. When choosing an internet marketing company, avoid those who guarantees success without demonstrating a significant plan involving trial, error, adjustment, and continued investment to see what works. Ask for research that demonstrates the best key words for high ranking in your business and in your region, and analyzes how your competition is placing. Choose a provider who commits to regular traffic reports to analyze what is and is not working and understand that success is based on many factors out of your control, which change all the time. For instance, if you spend $500 in a month to ensure a key word important to your region places you on the top three results of a search page, but your competitor spends $1,000 in a month for the same word, your competitor will out rank you. This is how it works, so you need to approach internet marketing as an evolving strategy requiring long term investment, both in time and money. Your goal is to build a foundation that tells the search engines you are a reputable player so they send the traffic your way. You are competing with others trying to do the same.
As you can see, optimizing your website is all about making it as effective as possible to help reach your business objectives. I always remind people there is a lot you can do to reach your business objectives before investing in search engines, and even social media, despite the current hype.
Mike Ciesiensky is the President & Founder of LandBrokerWebsites.com, a Crystalcore.net division. Ciesiensky is experienced in helping land and ranch brokers create websites to meet their business objectives. Ciesiensky presented at the 2016 National Land Conference in Dallas and is a partner of the Institute.
It was a brutally cold, windy and overcast morning in the Dakotas Territory. The year was 1871. Every living creature exhaling air was immediately turned into vapor from the freezing temperatures. We were soldiers in the 7th United States Calvary Regiment and this particular morning, we were not singing “Garyowens”. Thousands of settlers were flocking to the territory and our job was to protect them. At this moment, many of the settlers were being threatened by the bad guys and we were preparing to ride to their rescue.
Commanding F Company was the American icon Capt. John Wayne. His Second in Command was WWII hero Lt. James Stewart. Work with me here. We were divided into two wings. One the left wing, 1st Squad was manned by the great Virginian Sgt. Randolph Scott and 2nd Squad was led by the incomparable Sgt. Errol Flynn.
The right wing was led by the 3rd Squad’s fearless Sargent Glenn Ford, who later helped defeat the Japanese Navy at the Battle of Midway, and the 4th Squad was led by Yours Truly right out of “The Point.” Again, work with me. The battle lines were drawn and we were ready for action. Captain Wayne gave the order and the bugler belted out the Calvary charge. The horses leaped into action, our swords at the ready and at that very moment….my alarm went off and it was a Wednesday morning in 2015. Another missed opportunity to ride to the rescue. Or was it?
Scrutiny Looms Over Section 1031s
Section 1031 is beginning to receive scrutiny by Congress and that’s probably not a good thing. All of the appropriate organizations including the Institute are lobbying Congress to leave 1031 exchanges alone–and for all the right reasons. But this is Congress, and that means that this will probably become a huge political football. I have no inside information but based on being in practice since the late 70s, my gut feeling is that 1031 exchanges will be modified to some extent. Perhaps, the first 500k in capital gains can be passed on to a new replacement property or something along those lines may be the final result.
Can You Help Your Clients Without Using 1031s? Yes!
So, assuming that Section 1031 is changed in some fashion, how can Institute members ride to the rescue to still help their clients defer capital gains taxes, state taxes where applicable, depreciation recapture, the Obama care tax and possibly the alternative minimum tax when selling a clients’ property. Actually, there are options now and you don’t even need a 1031 to defer taxes. Let’s turn a negative into a positive.
Imagine not having to deal with a forty-five day identification time limitation or loan to value ratios. What if you could sell a client’s great property now, defer taxes and at any time in the future, you can buy any property that you would like for your client AND while you are looking for that property, your client can receive a check every month for roughly five to six percent of the sales proceeds while those proceeds are still tax deferred. Do you think that this might give you a competitive advantage over other brokers that are unable to provide this opportunity?
Imagine working and taking constant risks for thirty or forty years or more and when you’re finally ready to retire, you have to write a check for twenty-five to thirty percent of your liquid assets to the US Treasury before you can retire. Well, fortunately you don’t have to but when selling your clients properties, they do have to write a check to the US Treasury for twenty-five to thirty percent of their sales proceeds and for many, that’s THEIR retirement plan. You can still defer those taxes for your clients and keep more of their hard earned sales proceeds in their pocket and send less to Washington, even if a 1031 isn’t appropriate. Do you think that this might give you a competitive advantage over other brokers that are unable to provide this opportunity?
Another tax deferral strategy that might face Congressional scrutiny in the future is the stepped up basis. I have met a number of older land owners who intend to pass their property on to their heirs instead of selling their property because of the large tax liability that the sale will create, and because a 1031 isn’t appropriate. That’s not necessarily a bad strategy unless you make a living selling real estate. If you do sell real estate, it is possible for the land owner to sell their property and defer taxes and turn an illiquid asset into a lifetime retirement income. When the land owner passes on, the income can be passed on to the heirs. And you just sold a great property.
The great thing about the REALTORS® Land Institute is the sharing of ideas and strategies and that’s why Institute members and Accredited Land Consultants (ALCs) tend to be more successful and have higher incomes than non-members I certainly hope that Congress doesn’t make changes to Section 1031 but if they do, we can still ride to the rescue of our clients without having to be John Wayne or….even me. Let’s turn a potential negative into a positive today by recognizing there are other ways to defer our clients’ taxes than a 1031. You will sell more real estate and keep more of your clients’ hard earned sales proceeds in their pockets and sending less to Washington. Happy selling and deferring taxes!
David is a Partner at Creative Real Estate Strategies, a 2015 Silver Partner of the Institute, and has been in the industry since the late 70s. His years of experience help him to assist land brokers in helping their clients defer capital gains tax, state tax and depreciation recapture taxes on their client’s sales proceeds when either their clients are unable to complete their 1031 or the client would like to sell and retire but still defer taxes. By understanding these tax deferral strategies, brokers have been able to sell more real estate. David can be reached at 713-702-6401 or at David@cresknowsrealestate.com
I went to work on August 12th with a lengthy to-do list. I knew it was going to be a busy day and an especially interesting lunch hour. Like most of us involved in farm management and agricultural real estate, I was eager to hear the USDA Crop Report. In today’s fast-moving world, that report can affect the market strongly and swiftly.
It is uncertain whether anything can spark substantial movement until farmers hit the fields. Only when grain crosses the scales will we know what crop we have. Until then, estimates are just educated and calculated “guesses”. Some theorized that FSA preventive planting numbers released on August 17th could’ve provided a bounce. Although there were over 2 million acres prevented from being planted in Missouri and Illinois, the 17th came and went without much movement. Extenuating circumstances abroad could move the pre-harvest market, but that is often harder to project than the crop itself. China’s currency devaluation was the buzz during the week of August 10th. Oil hitting a six-year low on Monday, August 17th is the chatter right now. What remains to be seen is whether any of these outside factors can substantially alter commodities in the interim. If we had gotten a hot dry-spell in August, that could’ve swung the pendulum…but that was a big if.