A 1031 exchange is a specific type of transaction which allows an investor or property owner to sell their property and invest in a like-kind property such as farms for sale in Florida. So long as the procedures set by the IRS are strictly followed, an investor or property owner can defer paying taxes on capital gains or losses incurred as a result of the sale.
Under section 1031 of the Internal Revenue Code, a like-kind property is defined as a property that is similar in nature or character as the property that is intended to be sold. For example, a land owner who is invested in Florida farm land can qualify for a 1031 exchange if they are interested in investing in other Florida farms for sale. Although the IRS does not consider any differences in property quality or grade, there are a few exceptions to the types of properties that qualify as like-kind. Some of these exceptions include properties that are located outside of the US, land that is under development, and property that is purchased for resale.
When it comes to the 1031 tax exchange for the purchase of Florida farms for sale there are a few potential pitfalls investors and property owners will have to watch out for. This is why it is recommended to seek the experience and knowledge of a tax professional who is experienced with 1031 exchanges if you are considering this type of transaction.
Here are three potential pitfalls that land owners should take into consideration:
1. 1031 is a tax deferment, not a tax loophole: Many investors and property owners are under the false impression that a 1031 tax exchange is a “tax-free” transaction. This is inaccurate. A 1031 tax exchange is a tax deferment, meaning that the taxes owed to the IRS as a result of capital gains from the transaction are deferred until the property is later sold. In addition, if either party involved in the transaction takes possession of any cash proceeds prior to the exchange, the capital gains from the sale are considered taxable.
2. Personal property does not qualify for a 1031 exchange: The IRS does not allow personal properties such as vacation homes or permanent residences to qualify for a 1031 exchange. All properties involved in a 1031 exchange must be owned and solely used for the purpose of business or investing. If personal property is found to be used in an exchange, any capital gains resulting from the transaction for either party are immediately taxable.
3. Related parties: The IRS imposes special rules and restrictions on 1031 exchange transactions that occur between related parties. Related parties can include family members, corporations for which one party holds more than 50% ownership, and partnerships in which one party directly or indirectly owns more than 50% interest of the capital or profits. Under the related parties rule, the IRS stipulates that the properties involved in a transaction between related parties must be held for a minimum of two years.
If either property is disposed of prior to the two year mark, any capital gains or loss will be considered taxable as of the date the property is disposed of.