A 1031 exchange is a legal procedure that can be used to avoid paying taxes on gain that is realized from the sale of certain real estate. If real estate is held by a business for business purposes, or if it is held for investment, income taxes have to be paid on any gain from the sale. If the property has been held a long time, or if it’s in an area that has increased significantly in value, the income taxes could be significant.
A way to avoid those taxes is to do a 1031 exchange. Instead of selling the property and paying taxes on the gain, an individual or a business can choose to do exchange the business or investment property for another piece of real estate and qualify for a 1031 exchange.
1031 exchanges can only be done in New York if the transaction meets certain requirements, which are strict. In order to qualify as a 1031 exchange, the real estate to be sold, as well as the real estate you are purchasing, both must be “qualified property”. Qualified property is property that is held for productive use in a trade or business or is held as an investment.
There are also strict time requirements. Under the rules, within 45 days after closing on the sale of the property you wish to exchange, you must provide a qualified intermediary with a written statement identifying the replacement property you wish to purchase. You can identify up to three properties that you may wish to purchase. In addition, within 180 days of closing on the property you are selling, you must complete the closing on one of the properties that you’ve identified as your replacement property.
Finally, you must use a qualified intermediary to facilitate the exchange. The qualified intermediary is assigned the seller’s interest in the property that is being sold.
The proceeds from the sale will be paid to the qualified intermediary, who will hold the funds until the replacement property is purchased.
It’s critical that the seller not receive any of the funds from the sale.
A 1031 exchange in New York is a great tool that can be used to avoid paying capital gains taxes. However, the exchange must be correctly done.
If you’re seeking help for a 1031 exchange, call the New York 1031 Exchange Attorneys at Friedman & Ranzenhofer at 716-542-5444. Our attorneys will be happy to help.