Home    |   Real Estate   |   IRC §1031 Like-Kind Exchanges

As a real estate investor, having a well-planned strategy allows you to free up capital for new investments. Qualifying like-kind exchange rules under Section 1031 of the Internal Revenue Code allow you to defer tax liability and utilize your capital gains to reinvest in the real estate market. These like-kind exchanges provide a framework that, when navigated correctly, can lead to significant financial advantages and investment opportunities, helping you strategically grow and diversify your investment portfolios. Whether you are buying or selling a business or investment property in New York or elsewhere in other states , understanding 1031 like-kind exchanges is essential for investors who want to maximize profits and opportunities.

What Is a Like-Kind Exchange?

A like-kind exchange, as stipulated under Section 1031 of the Internal Revenue Code (IRC), is a powerful tax-deferral strategy used by real estate investors. It allows for the deferment of income tax liabilities on the gains from the sale of an investment property that has been interchanged with a “like-kind” property. Essentially, capital gains taxes are postponed, providing the investor with more capital for investment purposes in the immediate term.

Understanding Properties Related to Like-Kind Exchanges

The nuanced laws and regulations governing 1031 like-kind exchanges require a thorough understanding of the properties that are eligible for these transactions. Distinctions between included and excluded properties are important to comprehend, as they directly influence the eligibility and success of the exchange process, with clear demarcations dictated in the tax code.

What Properties Are Included

The term “like-kind” refers to the nature or character of the real property rather than its grade or quality. Any type of investment real property that is not held for personal use may qualify for a Section 1031 Exchange. This includes apartments, commercial buildings, student housing, undeveloped land and development rights (a/k/a “air rights”), as long as they are held for investment or used in a business. The term “like-kind” does not mean you have to replace an apartment building with another apartment building—the replacement does not have to be exactly the same type of real property—it just means you have to replace real property with real property. If you are selling real estate in the United States, then the replacement property may be located in different states, but not outside of the United States or in a United States territory. Similarly, if you are selling real estate located outside the United States, then the replacement property must be located outside of the United States.

What Properties Are Excluded

Not all properties are eligible for 1031 like-kind exchanges. The primary residence, vacation, or second homes held primarily for personal use, and properties held for sale or to be “flipped” are excluded from Section 1031 of the IRC. The laws regarding excluded properties are nuanced. For example, second homes that are primarily rented out for the years before or after the exchange may qualify. The experienced New York City real estate attorneys at Holm & O’Hara LLP can help you determine if your properties are included or excluded.

​Qualifications for 1031 Like-Kind Exchanges in NYC

To qualify for tax deferral under Section 1031 of the IRC in New York, the like-kind exchange must meet the following qualifications:

  • Both the relinquished property and the replacement property must be held for productive use in a trade or business, or must be held for the purpose of investment.
  • Investment in the new property or properties may be deferred, but all of the capital gains from the relinquished property typically must be used for new investment.
  • The process must involve a Qualified Intermediary (QI). The QI holds the proceeds from the sale until such proceeds are used to acquire the replacement property, maintaining the transparency and integrity of the exchange.
  • The replacement properties must have the same or greater amount of debt as the relinquished property.

The Structure of a Like-Kind Exchange

It is essential that the real estate transactions are structured correctly as a 1031 like-kind exchange. The types of 1031 like-kind exchange structures are as follows:

Simultaneous Swap

The simplest type of Section 1031 exchange is a simultaneous swap, which occurs when the relinquished property is sold at the same time that the replacement property is acquired. These do not have to be a direct swap of one property for the other; the transactions just need to occur in the same time frame.

Deferred Exchanges

Deferred exchanges are a bit more complex but allow more flexibility. With this structure, you can dispose of property and save your capital gain to later acquire one or more other like-kind replacement properties. These exchanges require that the sale and purchase of the properties be parts of an integrated transaction, usually require funds be held with exchange facilitators, and have various due dates that must be strictly followed.

Reverse Exchange

A reverse exchange is more complex than a deferred exchange, but it also offers flexibility. In a reverse exchange, the replacement property is purchased first through an exchange accommodation titleholder, who holds the property for no more than 180 days, during which the relinquished property is sold.

Time Restrictions for Deferred Exchanges

Timing is of utmost importance when it comes to 1031 deferred exchanges . From the closing date of the relinquished property, investors have 45 days to identify potential replacement properties and 180 days to complete the purchase using the tax deferred funds. These dates are non-negotiable, and failure to comply results in a disqualified 1031 Exchange, thereby losing the tax benefits.

Work with Our Experienced NYC Real Estate Attorneys

Navigating through the intricacies of 1031 like-kind exchanges can be complicated, with all of the exchange rules and due dates to consider. Partnering with the real estate attorneys at Holm & O’Hara LLP will ensure nothing slips through the cracks. With our hands-on approach, our team is available when you need us. Our real estate attorneys have in-depth experience with IRC Section 1031 and exchange structures and protocols, as well as the various deadlines entailed. Our dedicated attorneys furnish indispensable assistance to real estate investors who want to secure the advantages of tax-deferred exchanges.

From pinpointing like-kind properties to working with your tax professional, our experienced team will ensure a smooth, compliant transaction. We can optimize your financial benefits while mitigating your tax obligations. Contact us to schedule a free consultation with one of our experienced NYC real estate attorneys and find out what opportunities are available to you.

Attorneys

Get in touch

Contact Us

Call the main office at
(212) 686-2280

Search for
an attorney

Send email inquiries to
info@hohlaw.com

We vigorously represent our business, individual, and estate clients in a wide range of legal actions, whether they are the plaintiffs or the respondents

The attorneys in our labor practice collaborate closely with our union clients, their business managers and members in a broad spectrum of areas

Holm & O’Hara LLP’s Trusts & Estates practice is dedicated to crafting effective estate plans that honor your wishes and safeguard your assets

Holm & O’Hara LLP’s attorneys have decades of experience representing purchasers, sellers, and borrowers in commercial and residential real estate matters