Often underutilized and misunderstood, the 1031 exchange is a powerful tool for realigning land ownership while deferring capital gains taxes.
Recently, I spoke with a landowner and farmer in Lancaster County who has watched suburban sprawl steadily encroach on the land he’s loved his entire life. He’s been offered what he described as “crazy money” for his property. For years, those offers were easy to decline—his lifestyle and connection to the land mattered more than the payout.
That calculus is starting to change. Distribution centers, expanded power infrastructure, data centers, and housing developments are rapidly altering the surrounding landscape. For the first time, he’s seriously considering selling and relocating to a region less affected by development.
His hesitation centered on two concerns: ending the legacy of his family farm and the tax consequences of selling. He’s come to terms with the legacy issue, recognizing that he held out as long as he could—and that a new chapter can begin elsewhere.
At the top of his desired location list is Bedford County because of some of the lowest property taxes in the Commonwealth and relatively inexpensive land. Taxes, however, remained the sticking point. Despite decades of capital improvements, the gap between his cost basis and today’s offers is substantial.
That’s where the 1031 exchange comes in.
Simply put, a 1031 exchange allows an owner to swap one investment property for another “like-kind” property and defer capital gains taxes indefinitely. While the IRS rules are strict, they are generally straightforward and manageable with proper guidance.
In Pennsylvania, 1031 exchanges have long been underused—largely due to a lack of awareness. Until 2023, Pennsylvania residents and businesses could defer only federal capital gains taxes, which limited their effectiveness. Today, both federal and state capital gains taxes can be deferred, making the strategy far more powerful.
The 1031 exchange is often misunderstood as a tool reserved for institutional investors or high-volume flippers. In reality, it’s one of the most effective planning tools available to everyday landowners and property owners sitting on significant unrealized gains who are considering a move.