March 28, 2014

What You Need to Know about 1031 Exchange

1031 exchanges, or “like-kind” exchanges, are an important tax savings tool if your investment property has increased in value, but they can be complicated. At the Strazzullo Law & Associates, PLLC, our New York real estate lawyers have been helping clients with property issues like 1031 exchanges, landlord-tenant disputes, and title issues for over 13 years. We always give our best to our clients, and one of our key goals is educating our clients, so we have published this article to help explain some of the basics in like-kind exchanges.

With a 1031 exchange you are swapping your property for a “like-kind,” or similar property owned by someone else. So you are deferring taxes on any profit you would have received selling your property and now own a new property. The result is that you postpone the taxation of gain because the swap is treated as if it were a continuation of the property you gave up. For example: Say you exchange a rental house with an adjusted basis of $250,000 for other investment real estate with the same adjusted basis of $250,000. The fair market value of both properties is $500,000. No gain is recognized on the transaction, thus the taxes owed don’t go up.

But the 1031 exchanges may only take place between similar property, recognized as like-kind by the IRS. Like-kind properties have the same characteristics, even if they differ in grade or quality. In the United States, all investment or business real estate is like kind with all other such real estate in the U.S., no matter the location or type. For instance, an apartment building in California is like kind to an office building in New York.

While you’ll never recognize any gain on which to pay taxes, if you keep exchanging your property, sooner or later you’ll probably want to sell the replacement property for cash. When this occurs, the original gain, plus any additional gain since the swap is subject to tax. This is why a 1031 exchange is tax deferred, not tax free.

To find out more information about 1031 exchanges, qualified intermediaries, and exchange agreements, click here or call the Strazzullo Law & Associates, PLLC today at (800) 476-9993 to speak with a knowledgeable Brooklyn attorney.