When someone sells an investment property in New York the sale proceeds are generally subject to the federal gains tax.
Under Section 1031 of the Internal Revenue Code, however, an investor may defer the gains tax from the sale of an investment property if certain criteria are met. Simply put, if the Exchangor sells one piece of real property and purchases another “like-kind” property within a specified timeframe, the transaction may be eligible for “1031” treatment. For those interested in learning more about 1031 exchanges in New York, here are 10 things to keep in mind:
- A 1031 Exchange is a tax deferment – not tax forgiveness. It is important to keep in mind that when the investor eventually sells the replacement property a federal gains tax may be due.
- A 1031 Exchange does not apply to residential property. The properties being relinquished must be used for business or investment purposes. An exchange cannot be made for a personal residence or vacation home.
- Corporations or businesses are not the only ones eligible to conduct a Like-Kind Exchange and reap the benefits of the tax deferral. Private individuals may also take advantage this tax treatment with investment property.
- Section 1031 applies only to property within the United States. An investor cannot exchange a piece of property within the United States for one that is outside the country.
- In a 1031 Exchange, the “property” can actually include several properties so long as certain criteria are met.
- An investor cannot exchange real property for personal property. For example, you would not be able to exchange a house for a boat because those two things are not “like-kind”.
- Once an investor has identified a property they wish to exchange, that property cannot be substituted.
- An Exchangor is allowed to acquire less property than originally identified, however, it cannot be substantially less than initially designated.
- At no point during the process should the Exchangor take control of any of the funds that are being exchanged. For a clean exchange, all funds should flow through a qualified intermediary. Interfering with, or taking control of the money can violate Section 1031 eligibility, thereby creating potential tax consequences.
- An investor cannot act as its own facilitator, and it also cannot be anyone who works for, or represents the investor. An outside intermediary will oversee the transaction and act as a go-between for you and the other parties involved in the Exchange.
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