Have you ever wondered whether buying raw land with a 1031 exchange is possible? If so, you’re not alone! Many people are interested in this option as an investment strategy. But what exactly is a 1031 exchange, and how can it help you purchase raw land?
A 1031 exchange is a type of transaction that allows investors to defer their capital gains tax when replacing an investment property with a like-kind asset. If you sell an investment property and then use the proceeds to purchase another like-kind property within 180 days, you can defer capital gains taxes on your profits. This process can be used for more than just real estate investments – it can also be applied to undeveloped land purchases.
So can you buy raw land with a 1031 exchange? The answer is yes! When buying raw land with a 1031 exchange, the key is to ensure all the details are in order before proceeding. Make sure that you work closely with a 1031 exchange expert or attorney who understands the nuances of these transactions and can help ensure everything goes smoothly.
Read on to learn more about this unique opportunity and why it might fit your financial goals.
Buying Raw Land and Real Property With a 1031 Exchange
A 1031 exchange provides an opportunity to defer capital gains and utilize the profits to invest in new like-kind property. Even raw or undeveloped land can be exchanged under the Internal Revenue Code Section 1031.
However, you will be obligated to pay state and federal taxes on the excess between the price of your undeveloped land and its sale price if you do not arrange a 1031 exchange before selling the land. These tax rates can range from 20 to 30%, and your total taxable income in certain areas, like California, may exceed 40%.
Intent Is Everything
Your raw land replacement property must be intended for business or investment, for example, if you sell your farm through a 1031 exchange and want to trade it for vacant land that will be put to productive use. These objectives can include capital growth or revenue from rental operations. Your new property doesn’t necessarily need to be profitable to satisfy the requirement that it is being held for investment.
However, you cannot do a 1031 exchange if you plan to make modifications and profitably sell the vacant land you bought. Instead of an investment or commercial objective, the IRS would consider this to be a purchase with the intent to sell.
You Can Only Use The Land for Investment Property
You cannot trade undeveloped land for a personal residence, since personal property is not eligible for a 1031 exchange. However, if your intention is to construct a rental house or lodge on undeveloped land, you could still be allowed to carry out your trade and partially postpone capital gains tax.
One strategy is to buy the vacant land as your replacement property but to keep a small portion of it out of the exchange so you can use it to construct a house. You need to use non-exchange resources to buy this property since it wouldn’t be included in your exchange procedure.
By using this strategy, you might be able to build a primary residence for your own use while still receiving the full benefits of a tax-deferred exchange. This is a relatively complicated procedure, and it’s always advised to consult with a 1031 exchange advisor or tax professional before starting. Unless you follow the guidelines set forth by the IRS, you may later be found liable to pay capital gains taxes associated with the exchange.
What About Raw Land Replacement Property?
You are free to buy any property with the money you receive from selling your land as long as it is held for business or investment purposes. You may reinvest in additional plots of land suitable for farming, office space, residences, a warehouse, storage facilities, rental properties, shopping malls, and more.
Landowners find NNN commercial buildings appealing since they have long-term rental contracts, and the tenant is responsible for paying bills, repairs, and upkeep, leaving the investor free from these concerns.
After selling your land for a profit, you may invest in a number of commercial properties or become the owner of buildings occupied by a high-net-worth renter. You may even invest in a facility that the federal government rents.
About Built-to-Suit 1031 Exchanges
Built-to-suit exchanges are comparable to delayed or reverse exchanges where the taxpayer utilizes an Exchange Accommodation Titleholder (EAT).
In this exchange process, the exchanger can ask questions about the proposed replacement property and spend the exchange proceeds on the new property and upgrades.
The exchanger must first buy the new property and momentarily let the EAT hold the real property before work can begin. For the taxpayer’s benefit, the EAT reclaims the property so that title may be transferred when construction is complete. You can make a regular trade into the developed property after the building is finished or the 180-day exchange term has passed.
For the exchange to be tax-deferred, your new asset must possess an equity value equal to or higher than your relinquished property. It’s tricky to execute a built-to-suit exchange, so careful planning and expert assistance is essential if you want to complete the process in time.
The Bottom Line
When pursuing a 1031 exchange, it is advised to employ a trained intermediary to help interpret the many ways the word “like-kind” can be applied. The advantages of this type of arrangement could be tremendous, but if an investor unintentionally attempts to swap assets that are not deemed to be of like-kind by the IRS, they could get hit with a major tax burden.
The professionals at NNN Deal finder have years of experience conducting 1031 exchanges, so they can help you navigate the exchange procedure smoothly. If you have any questions about a 1031 exchange for raw land, call us at 00-240-9094 and we’ll walk you through the process.