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For Estate Planning, Estate Administration And Disputes

How real estate investors can benefit from 1031 exchange

On Behalf of | Mar 11, 2020 | Real Estate Law |

If you have one or more New York investment properties, you may be considering selling and reinvesting into other real estate. Although you might have concerns about paying the taxes, taking advantage of the 1031 tax-deferred exchange can defer that expense, depending on the circumstances. 

According to CWS Capital Partners, you can avoid the capital gains tax when you sell an investment property and reinvest in real estate of a like-kind with equal or greater value. There is a specific timeframe for the completion of this procedure. 

When You Can Use a 1031 Exchange 

Tax deferral is the primary benefit of carrying out a 1031 exchange, rather than completing the sale of one property and purchase of another. By avoiding the tax, you can free up more funds to put towards the replacement property. Reasons for utilizing this procedure include: 

  • Diversifying assets 
  • Moving to a managed property 
  • Consolidating several properties into one 
  • Resetting the depreciation clock 

These transactions are complex and typically require a holding time and relatively high minimum investment. 

Timing and Rules for the Replacement Property   

A “like-kind property” refers to the characteristics or nature of the real estate, not the grade or quality, which allows considerable latitude when defining the replacement property. While you can exchange an industrial real estate for residential and vacant land for a commercial building, the 1031 exchange does not apply to artwork or other types of “property.” To get the most from the exchange, you must meet one of three rules: three-property rule, 200% rule or the 95% rule. 

There are different types of like-kind exchanges. Each has timelines, procedures and requirements that apply. Commercial real estate transactions are often complex and represent a substantial expenditure. It is critical that you understand the ramifications of each purchase and sale to protect your investment.