Residential investors who own single-family homes, townhouses, condos and more are often able to sell their property and book a gain.
A challenge faced when rolling this capital gain into a pricier property with higher rental income is that you may be subject to a tax on this capital gain when you sold, lowering your equity base.
This is because investment properties do not qualify for primary residence tax exemptions on capital gains in the tax code.
A potential solution to this capital gains tax problem is to enter into a 1031-exchange.
These are federally-sanctioned, tax-deferred transactions that allow you to roll your whole gain, sheltered from the capital gains tax, into a new property if your transaction meets the following criteria:
1) Prior to your sale, you sign an exchange agreement with a qualified intermediary.
2) You identify a qualified like-kind replacement property within 45 days of your closed sale.
3) You close on the replacement property within 180 days of your closed sale.
There are additional rules and qualifications. Also, taxes will need to be paid at a future date once you stop rolling further gains into new properties, though as a practical matter, one can use 1031 exchanges in perpetuity.
We often assist our exclusive purchaser clients with investment property upgrade transactions in which 1031 exchanges are utilized to great effect.
In doing so, we help them connect with New York-based attorneys, accountants and intermediaries well experienced with 1031-exchanges who can give proper legal and tax advice.
As a team, we work together to identify properties qualifying as “like-kind” and to ensure timelines are met to capture the benefit.