Considering a 1031 Exchange? Understand the Benefits… and Risks

You may have heard the term 1031 Exchange, but aren’t sure exactly how it works. Put simply, it’s sometimes called a “like-kind exchange,” meaning it’s a swap of one business or investment asset for another. Any type of investment property can be exchanged for another type of investment property. For example, a like-kind exchange could be exchanging land for an industrial building.

Of course, there are tax implications with a 1031 Exchange you have to consider. It doesn’t allow you to exchange the asset “tax free,” but in some cases, you can defer paying capital gains taxes on an investment property when it is sold, as long as another “like kind” property is purchased. In order to completely avoid paying any taxes upon the sale of your property, the net market value and equity of the property purchased must be the same as, or greater than, the property sold. In other words, the tax that would have been due upon sale is postponed, and payment is deferred, until the replacement property is sold.

“We have many clients who use the 1031 Exchange to purchase land—either a hunting tract, or a farm they can make their weekend retreat,” said Brian Wilson, Relationship Manager. “We understand the tax implications and work with each client individually to provide financing solutions that are right for them.”

We have many clients who use the 1031 Exchange to purchase land—either a hunting tract, or a farm they can make their weekend retreat.
-Brian Wilson, Relationship Manager

Critical point to consider? Timing . . . because the IRS requires an investor to have a suitable replacement property within 45 days of selling their relinquished property and complete the acquisition within the 180-day closing period. Delays can happen for many reasons. If a timeframe is missed for any reason, a 1031 investor can risk disqualifying their entire exchange and may run the risk of heavy tax consequences.

It’s important to talk with a professional before making decisions on whether or not your property qualifies as a 1031 Exchange. Email us at LandFinancing@SWGAFarmCredit.com.