A 1031 Exchange allows for the sale of real estate, the proceeds from the sale are reinvested into another piece of investment real estate, paying no taxes.
This sounds simple enough but the transaction is structured with non negotiable time frames and rules to be adhered to. For example, the 1031 exchange must be handled by a disinterested party such as a Title company. A title company is considered to be a qualified intermediary. A qualified intermediary plays an essential role in the client's 1031 exchange. A qualified intermediary is also known as the facilitator and accommodator. The intermediary enters into an agreement with the seller and all monies from the sale go through the intermediary as well as all the information on the property you are buying in the exchange.
Different companies handling 1031 exchange transactions function in different ways but the company must be a good match for your transaction. Do your due diligence! The importance of choosing the right qualified intermediary cannot be overstated. The company you choose must have the necessary insurance, financial backing and be licensed and bonded. Large title companies work well in these type transactions. The intermediary must open a segregated account in the seller's name where the monies are safely held. Specific times and dates have to be followed for the exchange to be recognized. For example, the formal process of identifying exchange properties must be by midnight at 45 calendar days from the day you sell and must be submitted in writing to authorized persons. The information on the property must include the legal description, address and % ownership. There is a total of 180 days from start to finish to acquire a replacement property and close. The attorneys and CPA's involved in the exchange must be clear on the closing date and that this is a 1031 exchange transaction. A residential property can be exchanged for a commercial property or be invested in a passive investment via for example Delaware Statuary Trust. A seller can identify up to 3 replacement properties. A seller must know what all of their options are for this exchange. This type exchange is also known as a forward exchange.
Some of the asset classes that qualify for a 1031 exchange are:
Triple net buildings, multi family complexes, industrial center, rental houses, shopping centers, air rights and Delaware Statuary Trust's.
Limited partnerships, LLC's and REIT's are not real estate and do not qualify in a 1031 exchange.
Most importantly, the IRS looks at your intent for doing the 1031 exchange. What is your reason for purchasing the asset? For example, a long term investment works. There are no specific guidelines for a hold period but 2 years and above may qualify for 1031 purposes. No flipping homes! Debt must be replaced with equity, not equity with debt. Any money received and not replaced is known as boot and taxes must be paid on this money.
The person who sells must have the same tax I.D. Number as the one who buys.
The best of luck to you for a successful 1031 exchange.
If you are interested in selling your property or you know someone who is planning to sell their New York or Brooklyn property, whether a single family residential property, an apartment building, a commercial property, mixed use, multi family, coop or condo, vacant land or a development opportunity, call us. You will be very happy that you did.
We always bring our clients the top market price for their property and provide exceptional personalized service from initial consultation to closing.
Thank you,
Accord Real Estate Group
Your Brooklyn Realtors
