A second-generation New Jersey real estate attorney with over 40 years of experience in the real estate industry, Joel Furst has an extensive background in real estate, banking, finance, business, and commercial law. In this article, Joel shares the benefits of a 1031 exchange when transacting property investments.
A 1031 Exchange allows you to avoid paying capital gains taxes when you sell an investment real estate property so long as you reinvest your profits into another similar property within a designated time period.
Due to the fact that any money you receive from the sale of the property is taxable, you cannot receive the money when you sell the property. You will need a qualified intermediary to help with the exchange. This person will act as a middleman for the 1031 exchange and hold on to the proceeds from the property sale while you look for a new property.
Qualified intermediaries may include real estate agents, investment professionals, employees, attorneys, or certified public accountants. The qualified intermediary must be an independent third party and may not serve as the exchanger's agent. The intermediary coordinates and oversees the closings with the attorney and provides exchange transaction documentation in compliance with 1031 exchange rules and regulations.
Most importantly, you have 45 days to identify potential replacement properties. There are no extensions to this deadline. The identification must be made in writing and signed by you. Next, you will need to provide that identification of the potential replacement property to someone involved in the exchange. This could be the seller of the replacement property or the intermediary.
Following that, you will have 180 days to close on a replacement property. You will also need to complete Form 8824, which is used to report like-kind exchanges of business or investment properties.
Properties do not need to be the same type. For example, you can exchange raw land for a rental house, as long as they are being used for business or investment purposes. You can exchange like-kind properties from anywhere in the United States. An exchange can also include multiple properties. The sale of one property can be used to provide three different properties. This is acceptable as long as they are all used for business or investment purposes. The replacement property (or properties) must be of equal or greater value than the one being sold. If the replacement property is worth less than the one sold, you will then have to pay taxes on the difference.
At the closing, the relinquished property is transferred to the intermediary and then to the buyer. Title is conveyed directly from the owner/exchanger to the purchaser (not to the qualified intermediary) as allowed under Revenue Ruling 90-34/
About Joel Furst
A lifelong resident of Northern New Jersey, Joel is married with two grown sons. When Joel is not in the office, he enjoys watching baseball, playing golf, and traveling. Reach out to Joel for expert advice when buying or selling a home or investment property.
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