"Section 1031" is slowly making its way into daily conversation. It is a like-kind exchange, a swap of one investment property for another. If you meet the requirements, there will either be no tax or limited tax due at the time of the exchange.
A properly structured 1031 exchange allows an investor to sell a property, to reinvest the proceeds in a new property and to defer all capital gain taxes. IRC Section 1031 (a)(1) states:
“No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment, if such real property is exchanged solely for real property of like-kind which is to be held either for productive use in a trade or business or for investment.”
In effect, you can change the form of your investment without recognizing a capital gain, leaving investments growing tax deferred until retirement, when it is taxed as a long-term capital gain around 15-20% depending on income. Is a co-op investment property? That question will be tested more over the next few years as co-ops have been adopting more liberal sublet policies. There are a few caveats such as the two transactions must occur within 6 months and any cash received will be taxed, so it is important to talk to an attorney.
With co-ops becoming more like condos and condos becoming more like co-ops, many investors are carefully looking at their investments and determining what is best for their long term needs. Even if you own a co-op, you can treat it like a like-kind exchange in most circumstances and 1031 exchange to a condo or townhouse to give you more long-term flexibility.
IN SUMMARY: If you own an investment property and are thinking about selling and purchasing a new one…YOUR TEAM is the most important piece of the transaction.
YOUR TEAM - Real Estate Agent, Mortgage Broker/Banker (if applicable), Selling/Buying Attorney, and 1031 Exchange Attorney
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REAL ESTATE AGENT: Having a real estate agent who can help you both buy and sell and negotiate
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MORTGAGE BROKER/BANKER: You will need to estimate closing costs on the sale and purchase and your mortgage broker will help if you currently have a mortgage and/or planning to take out a new mortgage
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REAL ESTATE ATTORNEY: Your real estate attorney can help you draft a contract of sale and purchase to ensure timing is appropriate.
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1031 EXCHANGE ATTORNEY: Sometimes your real estate attorney will be the same person but if you’re re-investing in two different cities / states, you might want to have an independent attorney
I have experience with 1031 Exchanges and advising clients to time their sale and buy and help find suitable alternative properties. If you have any questions, please don’t hesitate to reach out to me at [email protected] or 212-941-2634.
