Gene's West Texas Cotton Farm: $4M Tax Deferred on a $10M Sale

Gene is a cotton farmer in his mid-70s who had spent his entire life farming in West Texas. The water table was depleting, yields were shrinking, and his sons had relocated north. He and his wife needed a retirement strategy with minimal savings to fall back on.

The numbers

Contract price: $10,000,000
Cost basis: approximately $1,000,000
Gain: approximately $9,000,000

The tax bill, without planning

Without a deferral strategy, Gene was looking at:

~$2.25M in federal capital gains
~$1.75M in depreciation recapture (decades of equipment, irrigation, and improvement deductions)
Total: over $4,000,000 to the IRS at closing

That would have left Gene and his wife with roughly $6M to fund retirement.

The strategy

Gene worked with Iron Ridge Advisors to complete a 1031 exchange into a Delaware Statutory Trust (DST). The full $10M sale proceeds rolled into a diversified DST portfolio.

The outcome

Deferred all $4M in capital gains and depreciation recapture taxes
Reinvested the full $10M
Structured for the potential of monthly income (mailbox money), not guaranteed, varies by sponsor, property, and market
Designed to take advantage of depreciation pass-through to potentially shelter a portion of distributions from current taxes

The legacy

Gene’s sons were structured to inherit separate DST shares with a step-up in basis at death, which can effectively eliminate the deferred tax liability. They went from inheriting a depleting cotton operation in a drought zone to inheriting fractional interests in diversified institutional real estate.

Gene transitioned from active farming in a declining water table to a passive structure built around institutional real estate.

Real names and exact numbers were not used. The concept reflected here is illustrative. Potential income, tax benefits, and appreciation are not guaranteed and may vary. DST 1031 properties are available only to accredited investors. Investments involve risk including loss of principal.