If you’re a Queens real estate investor, or if you’ve bought & sold properties here in the past, then you’re probably already familiar with the concept of a 1031 exchange. If you’re just starting out on Queens real estate investments or thinking of investing in the future, then you’re probably eager to learn about the 1031 tax-deferral option. So, we’ve prepared a primer on this important tool for your investment-planning purposes. This is a basic overview of what it is and how it works. For more details you can reach out to us, or contact your tax accountant.
A 1031 exchange, also known as a like-kind exchange or a Starker, allows you to roll over your capital from the property you have sold to the property you have recently purchased. The idea is that you would be able to avoid taxes until you sold your properties for cash at some later date, and ideally save some money by paying only one long-term capital gains tax. Even if your goals are not long-term but you are looking to save some money now, there is no limit to how often you can use a 1031 exchange, and paying little to no taxes with this type of transaction may seem mighty attractive.
There are two basic guidelines that apply to most cases.
- The value of your replacement property must be equal to or greater than the value of the property you have sold.
- All of the net proceeds from your sold property must be used to buy your new “like-kind” property.
Along with these requirements, there are two timelines to keep in mind while processing a 1031 exchange.
- You have exactly 45 days from the day you sell your property to find potential replacement properties.
- The exchange of properties must be completed within 180 days of selling your former property.
There are no extensions available, and if the required transactions are not completed within the number of days given, you will have to pay taxes on your sold property.
We do a lot of transactions with Sellers who take advantage of the 1031 Exchange whether they are buying another investment property, or retiring to another state and exploring ways to minimize their tax burden. Some of our clients take the proceeds and buy another investment property to defer the taxes and continue holding, that is the simple and more straight forward strategy. However, we’ve also had clients that get more creative, for example, we’ve had Sellers take the proceeds of their investment property in Queens to buy an investment property in the same state where they are retiring. Then they eventually end of moving into the investment property, live their for at least two years, and ultimately sell it as owner occupied which allows them to take advantage of the $250K per person tax exemption. This strategy has more moving parts, but at the end of the day, they were able to defer their tax burden completely.
This is a basic overview of 1031 Exchange. There are various processes, including delayed exchanges, depreciation recapture, and other deeper aspects of a 1031 exchange that could come into play, depending on each investor’s unique situation. Given the strict requirements and tight deadlines, most investors work with a tax advisor and an experienced Queens real estate agent when they are pursuing a 1031 exchange. We have helped a lot of sellers and buyers with 1031 exchanges in Queens so if you have any questions, you can always reach out to us.
Blog courtesy of George & Abigail Herrera w/the Queens Home Team at Keller Williams Realty Landmark II.