Learn
A little clarity for your next decision.
A little clarity for your next decision.
By Jerry Baker
A Kansas 1031 exchange can defer gain when qualifying business or investment real estate is replaced with other qualifying real estate. The replacement decision also needs to account for Kansas water rights, farm tenant rights, property taxes, and the demands of rental ownership. This guide helps you compare those issues with the limits and risks of a qualifying Delaware Statutory Trust, or DST. [1]
A tax plan answers one set of questions. An ownership plan answers another. How much work will you do? Who will handle problems? How much income needs to reach your household? What happens if the next few years do not go as planned?
For a Kansas farm owner, those questions may involve a tenant, a well, and land that has been in the family for years. For a rental owner, they may involve repairs, leases, and a property manager. The right next step depends on which duties you want to keep.
I would write a short description of the outcome you want before looking at investments. “I want less work” is a start. “I want to stop arranging repairs, keep enough cash for family needs, and review income each quarter” gives us more to work with.
Next, describe the asset you plan to sell. List the rights included, the debt, and the agreements a buyer will inherit. Identify gaps in the records now. Missing lease terms or an unclear water file can matter as much as the property's asking price.
Section 1031 generally applies to real property held for investment or productive use in a business. Personal-use property and property held mainly for sale do not meet that basic test. A sale that includes equipment or other assets requires separate analysis. Tax deferral is conditional, and some parts of an exchange may produce taxable gain. [1]
For a usual delayed exchange, arrange a qualified intermediary before the sale closes. You generally must identify replacement property in writing within 45 days after the transfer. Receipt must occur within 180 days, or by the tax return due date, including extensions, if earlier. The regulations also address control of sale proceeds and identification limits. [2]
Give the intermediary, CPA, and attorney the same description of ownership. If a trust, partnership, or other entity is involved, ask who must make the exchange and how the purchase should be titled. Resolve the answer before documents go out for signatures.
Build review time into the calendar. A legal right, loan condition, or incomplete report will not become clearer because an exchange deadline is near. Set dates for receiving records and making decisions, with room to consider alternatives.
Kansas's 2025 individual income tax instructions include income from Kansas real or tangible personal property in Kansas-source income for nonresidents. The instructions use an allocation process for nonresident and part-year filers. A mailing address outside Kansas therefore does not, by itself, settle the state filing question. Check the rules and forms for the actual tax year. [3]
Ask your CPA to show state and federal estimates separately. Provide purchase records, prior depreciation schedules, improvements, debt information, and a draft closing statement. The sale price and the taxable gain are not interchangeable numbers.
If you are moving at the same time, add the dates and facts of the move to the review. Do not assume that changing an address changes the treatment of every item of income. Let the tax adviser identify which state rules apply and what records support the result.
For planning, I would compare at least two paths: a taxable sale with cash available afterward, and a qualifying exchange with money committed to another property. Include realistic costs for each. That helps keep the tax savings from crowding out questions about the investment itself.
Kansas's property tax guide lists assessment rates of 11.5% for residential real estate and 25% for commercial and industrial real estate. Agricultural land uses a 30% rate applied to agricultural use value, while farm improvements generally use 25% of fair market value. Classification follows the property's actual use. These are assessment percentages, not annual tax rates on the purchase price. [4]
That distinction belongs near the top of a buyer's budget. An apartment building and a warehouse with the same appraised value do not necessarily start with the same assessed value. A farm can contain parts with different treatment.
The Department of Revenue explains the two steps: determine assessed value, then apply the local mill levy. A mill represents one dollar per $1,000 of assessed value. The local levy and the property's classification both matter to the bill. [5]
Here is a simplified illustration, not a quote for any parcel. At a $1 million appraised value, a residential assessment of 11.5% produces $115,000 of assessed value. A hypothetical 100-mill levy would produce $11,500 before any applicable adjustments. A commercial assessment of 25% produces $250,000; the same assumed levy would produce $25,000.
Use the actual tax statement and ask the county appraiser about classification, valuation, and possible changes. Do not apply the illustration to agricultural land's use value. Also ask the closing team about unpaid amounts and prorations. The goal is a documented expense line that matches the property you will own.
The Kansas Division of Water Resources administers water rights and permits. Its guidance explains priority based on earlier rights, annual water-use reporting, and approval requirements for changes such as the place or type of use. Domestic uses have a defined exception, but irrigation should not be treated as an informal extension of a household well. [6]
For an irrigated property, request the water-right numbers, permits, change orders, maps, and recent use reports. Compare those records with the wells and acres shown in the sales materials. Ask a qualified adviser to explain any mismatch.
Then separate legal permission from physical performance. A document can describe an authorized use without telling you how the pump performs today. Obtain a current assessment of the equipment, power needs, and available supply. A seller's account of a good season several years ago is not a current test.
Ask who files reports and keeps records. If the tenant handles that work, confirm how the owner receives copies. If a buyer wants a different crop or a new point of diversion, identify any approval needed before counting on that plan.
For a seller, a clear file helps a buyer understand what is being offered. For a buyer, it helps avoid paying for a use the property cannot support. Neither side benefits from leaving the water assumptions in a brief line of a brochure.
An April 2, 2026 Kansas Geological Survey report described provisional 2025 measurements showing an average increase of about 0.2 feet across the state's High Plains aquifer region. Results differed by district: southwest and northwest Kansas still showed declines. The report also noted a long-term regional pattern of decline. These are regional observations, not assurances about a particular well. [7]
A useful review asks what evidence applies to this parcel. Which monitoring locations are relevant? How much history is available? Does the measurement describe a resting water level or a test while pumping? Have conditions changed since the report was prepared?
Give the technical reviewer the proposed operating plan. A water question is easier to evaluate when the reviewer knows the crop, acres, equipment, and planned use. Ask for a range of outcomes and the signs that would require a change in operations.
Then reflect those answers in the budget. If lower use, added pumping costs, or equipment work is plausible, show the effect on income. A broad improvement in one year's water levels should not erase a property-specific concern.
Kansas regulations for Local Enhanced Management Areas, known as LEMAs, were amended effective April 10, 2026. They address multi-year fixed allocations and the contents of management plans, including controls affecting existing rights. The state rules are a framework; the applicable plan and orders are needed to understand a particular property's limits. [8]
Ask whether the land is within a management area, which order applies, and what period it covers. Request the property's allocation and use to date. Do not rely only on the annual amount shown in an older permit.
If a purchase occurs partway through a multi-year period, ask how much authorized use remains and how the transfer affects administration of the account. Have the adviser distinguish adopted limits from a proposal still under review. A map label without the order is not enough.
For a hypothetical planning exercise, assume a property's records allow a stated amount over several years. If a large share has already been used, the next owner's plan needs to reflect the remaining amount. Do not assume the purchase resets the period. Obtain a written answer from the appropriate authority before finalizing that assumption.
This is also a useful test of a tenant's plan. Ask how the tenant would operate within the documented limits and what expenses or changes that might require. The lease and the water budget should support the same business plan.
Kansas statute 58-2506 generally requires written notice at least 30 days before March 1 to terminate a farm or pasture tenancy on March 1, unless the statute or a signed written lease provides otherwise. Fall-seeded crops and continued occupancy after a written term have specific rules. The exact agreement and crop status matter. [9]
Have local counsel review the lease, notices, and any later agreements. Ask the tenant and owner to identify who pays for fences, wells, roads, and buildings. Include any side arrangement in the review rather than assuming the rent check is the whole relationship.
Do not promise a buyer immediate possession merely because the sale will close soon. A property can change owners while a tenant retains rights. Match the possession assumptions in the purchase agreement with the legal review.
For pasture, ask about the areas covered by the lease, water sources, fencing duties, and the way use is measured. For crop ground, ask about planted crops and work already done for the coming season. These are practical questions for the records and the parties, not facts to infer from an aerial photo.
Keep this timetable separate from the exchange clock. The tax plan may require a prompt purchase, while the operating plan requires patience. You need to understand both before deciding whether the property fits.
Kansas generally limits residential security deposits to one month's rent for an unfurnished unit and one and a half months for a furnished unit. There are separate provisions for pets and certain housing authorities. The return rules include a 14-day period after charges are determined and a 30-day outside limit tied to tenancy termination, possession, and tenant demand. Have counsel apply all triggers and notice duties. [10]
Request a deposit list by tenant, then reconcile it with leases and cash transferred at closing. Check recent move-outs separately. An unexplained deposit balance is a question to resolve before you take over the ledger.
City records provide another check. Overland Park offers a rental licensing and inspection map where users can search an address for registration and scheduled inspection information. Use it as a starting point, then confirm the property's current record with the city. The map is not proof that every repair is complete. [11]
Ask for open notices, inspection reports, repair invoices, and the owner's plan for unfinished work. Confirm the actual jurisdiction. “Kansas City area” is a location description, not the name of the authority that governs a specific building.
Compare the repair file with the income statement. A low repair expense can reflect good condition or postponed work. An inspection and a written first-year plan help distinguish the two. Add the cost of managing that work if you will not handle it yourself.
The Kansas Department of Insurance encourages consumers to ask about exclusions, deductibles, replacement cost versus actual cash value, and water damage or sewer backup. Its consumer page addresses home and renters coverage. An investment property needs its own quote and the right policy for its actual use; do not assume a personal homeowner policy covers a rental operation. [12]
Give the insurance adviser the inspection and loss history. Ask for the actual terms, not just an annual premium estimate. Which costs would remain yours after a covered loss? Which events are excluded? What income protection is included, if any?
Then choose a reserve using the property's needs. As an illustration, $48,000 of annual cash before a new reserve becomes $36,000 after setting aside $12,000. On $800,000 of equity, that changes the amount available to spend from 6% to 4.5%. Those figures are hypothetical and exclude tax and any omitted costs.
The reserve has not necessarily disappeared from your wealth. It is money assigned to property needs. The distinction matters when comparing the check you could withdraw with a quoted investment distribution.
Revenue Ruling 2004-86 describes circumstances in which a DST interest can be treated as real property for exchange purposes. The ruling includes limits on trustee powers. The specific trust and offering need review; the name of the structure does not guarantee qualification. [13]
A manager-run offering may change your daily duties, but it also changes who makes decisions. Ask who handles financing, major repairs, reserves, and a sale. Read the fees and business plan. Decide whether those terms fit the reasons you are selling your current property.
Private placements may be illiquid, offer limited information, and lead to total loss. Expected income and holding periods are not guarantees. Review your need for accessible cash before committing to a long-term investment. [14]
I would compare direct ownership and a DST using the same expense and risk questions. What work is required? Who performs it? What can interrupt income? Which assumptions are most uncertain? A familiar location or attractive percentage is only the beginning of that conversation.
Qualifying real estate generally can be exchanged for other qualifying real estate with a different use. Both assets and the transaction must meet federal requirements. Have advisers separate non-real-estate assets from the exchange analysis. [1]
No. The state's instructions include income from Kansas real property in the nonresident source-income rules. Check the applicable year, your residence facts, and the transaction with your CPA. [3]
No. It helps determine assessed value. The mill levy is then applied to that value. Use the actual classification, valuation, levy, and applicable adjustments for the parcel. [4] [5]
No. The April 2026 report describes provisional regional results with different outcomes across districts. Review the property's right, limits, equipment, and physical supply rather than treating an average as a guarantee. [7]
No. The general rule has exceptions, including terms in a signed written lease and rules for fall-seeded crops or continued occupancy. Have an attorney determine the correct date, notice, and method for your lease. [9]
No. Review the offering's loss, liquidity, financing, and operating risks. The convenience of having a manager does not make distributions or an exit date certain. Keep sufficient accessible money for your personal needs. [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.