Tax-deferred 1031 exchanges are great for the land market. By deferring capital gains taxes on the swap of one investment property for another, they provideboth the buyer and the seller multiple incentives to complete the transaction, helping create more activity in the market.

Firstly, when they’re doing a 1031, the buyer or seller is deferring their capital gains tax on a real estate transaction. In contrast, capital gains in stock market transaction, or another buy/sell transaction of an asset will incur a capital gain and therefore a capital gain tax. This frees up cash that they can reinvest into the land to increase its market value for any future sale.

Secondly,while most exchanges must be of “like-kind,” the rules are surprisingly liberal. This means you can exchange a strip mall or even an apartment building for raw land, or vice versa. You can even exchange a former property residence for the land, albeit under certain conditions.

Thirdly, even if both parties profit from the transaction, they still won’t have to pay any tax on the profit until they sell the land for cash many years later. Even then, they’ll have to pay only one tax, at the long-term capital gains rate (which is currently 0% for some lower-income taxpayers).

On top of everything else, there’s no limit on the number of times you can do a 1031. There’s also nothing in the law that bars you from doing it every few months. This means that as long as you qualify for a tax-deferred 1031 exchange, you can do it as frequently and as many times as you want.

All these factors help explain how 1031 exchanges could increase the buying/selling in the land market. They give both the buyer and the seller the option to save money on tax, which they could then reinvest in the land to increase its market value for any future sale.

At the same time, 1031 exchanges allow both parties to enjoy a deferment of taxes from the transaction, giving them the incentive to complete more transactions for more profit. This, as one might guess creates increased activity in the market and might also lead to an increase in land prices.

Talk with one of our agents about a 1031 exchange and how it can benefit you.