Taxes typically aren’t a topic that real estate investors enjoy talking about. However, 1031 exchanges in New York City are something worth getting excited about. While nobody can avoid taxes, this allows investors to defer their capital gains taxes in order to make huge savings.
William Timlen CPA says that for many, such big savings can feel like a pipe dream, but as long as real estate investors follow the exchange’s rules, it’s a completely legitimate and viable way to minimize tax obligations.
Understanding the Benefits of 1031 Exchanges in NYC Real Estate
Deferring taxes on capital gains lets potential future gains compound without shelling out until further down the track. Newbie investors should consider 1031 exchanges like 401k’s and IRA’s, wherein savings can grow without taxation until retirement and, thus, withdrawal.
In reality, they’re decidedly more complicated than retirement savings. However, the goal of allowing investments to thrive as tax efficiently as possible is equal.
Alongside the obvious positives of deferring tax, New York City 1031 exchanges bring a wealth of other benefits, including:
- Potential for increased cash flow
- No individual annual LLC filings
- Portfolio diversification
- Lowered barriers to entry and risk
- Non-recourse loans
- Wider pool of accessible properties
New York City Properties Eligible for Like-Kind Exchanges
Otherwise known as a Section 1031 exchange or like-kind exchange, the 1031 exchange is a segment of the US tax code that lets investors defer capital gain taxes after the sale of an investment property, as long as they reinvest the proceeds into a similar property.
As the above suggests, both properties (i.e., the one sold and the one exchanged for) must be used for investment/business purposes. This is not to be confused with primary residences and vacation homes!
On top of that, the term “like-kind property” means both buildings must be similar. According to the IRS, they must be of the same character, class, and/or nature. They keep it vague for a reason — compliance is ensured on a case-by-case basis.
How NYC Structures 1031 Exchanges
Due to the complexity of real estate transactions, there are three types of 1031 exchanges in NYC.
Simultaneous Swap
To achieve an exchange under Section 1031, properties must be transferred. In this case, it’s a simultaneous swap of one establishment for another, representing the simplest form of exchange.
Deferred Exchange
Complex but flexible, it allows investors to dispose of property and then get one or more like-kind buildings as replacements.
However, this is not the same as using the proceeds of a sale to buy another property, which would be a taxable transaction. Instead, the relinquished property and subsequent acquisition must be dependent parts of a holistic transaction.
Reverse Exchange
A reverse exchange is the most complex type, adding another convoluted layer to deferred exchanges.
In this case, the replacement property is acquired through an exchange accommodation titleholder who it had it parked for 180 days or fewer. Throughout this parking period, the taxpayer abolishes the relinquished property to close the transaction.
NYC Advisors Can Facilitate the Process
1031 exchanges can be tricky to navigate alone, so investors who aren’t familiar with the working methods should enlist the help of a professional exchange advisor to ensure the best results.
