1031 Exchange

The 1031 Exchange is a section of the tax code that allows investors to swap investments on a tax-free basis. Although 1031 exchanges are allowed for any business asset, they are commonly used in Real Estate to allow an investor to sell an investment property and obtain another without any tax penalties.

Why would anyone want to do a 1031 Exchange? With a 1031 Exchange, your investment continues to grow, tax-deferred. IRS rules state that only ‘like-kind’ assets can be exchanged – however, the meaning of ‘like-kind’ has proven to be very broad and typically unenforced by the IRS.

1031 Exchanges can be delayed – the sale and purchase of ‘like kind’ properties do not have to occur on the same day. Typical 1031 Exchanges are delayed, with the proceeds from the sale of the property held in escrow, and the funds later released to purchase another investment property. The tax code only allows 45 days for a ‘like-kind’ property to be identified for purchase using 1031 funds. The purchase must be completed within 180 days from the sale of the original property.

A few other caveats of 1031 Exchanges:

– Any leftover cash after the 1031 is completed is taxed as capital gain.

– 1031 exchanges can only be used for investment properties – primary residences do not qualify.

The information provided herein are not to be deemed legal advice and provide general information that is usually applicable to real estate transactions in New York City. Please consult with your attorney regarding the specifics of your transaction.