Skilled Guidance In 1031 Exchanges
New York City real estate law is notorious for being complicated. In order to secure the results you deserve, we at Allomong & Associates, P.C., want to help use the law to benefit you in all areas of your real estate needs. We strive to provide our clients with precise and efficient service in all areas of real estate law. One area that knowledge of the law can benefit you is in 1031 exchanges.
How 1031 Exchanges Work
Section 1031 of the Internal Revenue Code allows investors and business owners to exchange property for “like-kind” property as a means to defer capital gains taxes arising from the sale of business or investment property. Sale proceeds may then be used to buy “replacement property.”
To satisfy the requirements of 1031 and defer capital gains tax, the exchanger must assign the sale proceeds from the first investment property (“relinquished property”) to a qualified intermediary (“QI”). If the exchanger takes possession of the sale proceeds, all tax benefits offered under 1031 are forfeited.
45-day rule: After selling the relinquished property, the exchanger has 45 days to notify their qualified intermediary of potential replacement properties. Only these replacement properties will qualify for the exchange. We can help you organize the information you need using this convenient form.
180-day rule: The exchanger must receive the replacement property within the earlier of (1) 180 days after the relinquished property was sold, or (2) the exchanger’s tax return due date (including extensions) for the tax year during which the relinquished property was sold.
Qualifications For Investment Properties
Investment property is any property held for productive use of trade or business, or for investment. The exchanger should be able to substantiate that his or her primary intent was to hold the property for investment purposes or for productive use in trade or business.
1031 is not applicable to a primary residence or a second home unless the property was used for at least two years for rental to third parties. All exchanged properties must be located within the United States.
Things that are not investment property: interests in a partnership, stock in trade, property held primarily for resale, and certificates of trust/beneficial interests. Coop shares can be an investment property, as an exception to the rule against stock in trade.
Identifying More Than Three Potential Replacement Properties
The “three property rule” is frequently used by real estate investors. This rule allows a person making a property exchange to identify three like-kind properties, regardless of value, as replacement property. The “200% rule” is another commonly utilized identification rule, wherein any number of replacement properties may be considered as replacement properties if the total value of those properties does not exceed 200% of the value of the original property.
Knowing “Like-Kind” Properties
The like-kind properties must each be used for investment or business purposes, but that doesn’t mean they have to have the same exact use. An apartment can be exchanged for an office building, for example.
Examples of like-kind property that can be exchanged under Section 1031 include apartment buildings, single-family homes and apartments used as rentals, vacant land, office buildings, duplexes, warehouses, farms, utility easements, tenant-in-common (TIC) interests, etc.
Examples of non-like-kind property that cannot be exchanged under Section 1031 include: primary residences, stocks, bonds, notes, mortgages, cash, equipment, goodwill, inventory, and interests in a partnership.
How “Boots” Relate To Financing
If you end up with cash to even out the value of the two exchanged properties – often called a “boot” – that cash is taxable at current capital-gains rates. A “boot” is also any property the taxpayer receives in the exchange which does not qualify as “like-kind” property.
If an exchanger does not acquire a Replacement Property with an equal or greater amount of debt, he or she is relieved of a debt obligation, which is considered “mortgage boot.” The IRS considers this reduction in debt a benefit to the exchanger; therefore, it is taxable, unless it is offset by adding equivalent cash to the replacement property purchase.
Contact Us For More Information
We pride ourselves on guiding our clients through their real estate needs. Our founding attorney, Tim Allomong, is a Manhattan real estate attorney and qualified intermediary for 1031 exchanges. Tim oversees exchange proceeds in a separate attorney “IOLA” escrow account. The funds are not re-invested in uncertain or dangerous investments, which is still the under-disclosed practice of our conglomerate competitors.
If you are looking to defer capital taxes, or if you have any other questions about real estate law, contact us today. Our New York City team is ready to answer your questions and provide you with the help you need. Call 917-764-8530 or email us here to schedule your initial consultation today.