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How to Do a 1031 Exchange in New York

A 1031 exchange is a valuable tax tool that allows you to grow your real estate investments while minimizing the costs and taxes you typically face, and it can enable you to change how you’ve invested to better suit your long-term financial goals.

From the first steps to take to the many considerations you need to keep in mind, this article will guide you through a 1031 exchange in New York — including state-specific tax requirements you should be aware of to claim a 1031 exchange successfully.

1031 Exchange Simplified

A 1031 exchange in New York allows you to swap real estate properties to grow your investment portfolio. The key benefit of a 1031 exchange is that you can defer any capital gains tax from the sale of a property by applying it to purchasing another property of like kind. (This is why you may hear this type of exchange or tax break referred to as a like-kind exchange.)

Of course, you can’t just swap any property. It must be an investment or business property, meaning you can’t use your principal residence or vacation home to take advantage of this tax tool. But, beyond this, the term ‘like-kind’ gives you great flexibility.

You can go from being a residential landlord to an NNN lease owner and vice versa, which completely alters the type of real estate investment you have.

It’s also important to note that a 1031 exchange doesn’t mean you won’t pay taxes on your property sale; it just means you can pay them later.

Step 1: Assessing Your Need for a 1031 Exchange

A 1031 exchange can be a valuable tax tool to help you grow your real estate investment portfolio. It allows you to change your real estate investment type to find a more valuable asset, switch to a more passive real estate option, consolidate your investments, and even diversify your portfolio by getting multiple properties.

There are many situations where a 1031 exchange is advantageous to your financial situation. It allows you to do all these different things for your portfolio while deferring any capital gains taxes you may incur while changing it. This tax tool is for you if you’re considering selling and reinvesting an investment property.

Step 2: Selecting Suitable Replacement Properties

When it comes to selecting a suitable replacement property, careful budgeting and financial planning are required, as your replacement properties need to meet specific rules and criteria.

There are two rules you need to be aware of: one, the 200% rule, and two, the 95% rule. These dictate what you can apply to a replacement property based on the property value you plan to sell.

It’s important to plan around these rules to ensure your exchange will qualify for a tax deferment and not leave you with unexpected income tax owing for the tax year. You’ll also want to closely assess the real estate market within New York to be sure this investment is the right fit for your long-term financial goals.

Step 3: Initiating the Exchange Process

To begin the exchange process, you’ll require a qualified intermediary in New York, such as Net Lease Finder. This is an essential part of a 1031 exchange in New York, as your QI (qualified intermediary) will need to be the one to handle the cash from the sale and purchase of a new property to claim a 1031 exchange on your income tax return.

It’s also essential to notify the QI of every step related to the exchange and to have these steps in line with the 1031 exchange time limits in New York. For an exchange to qualify, there is a strict 180-day deadline from the date the property ownership is transferred.

Within the first 45 days of the 180-day deadline, you must notify your QI of potential replacement properties (and don’t forget to adhere to the 95% and 200% rules).

Step 4: Navigating New York-Specific Considerations

There are some unique 1031 exchange rules in New York to consider if you’re planning one in this state. It’s not a taxless state like Texas or Florida; instead, it has an additional tax for 1031 exchanges by non-New York residents.

If you’re selling a property in New York for the exchange, any value you gain from the sale will be taxed at 7.7% unless you apply for a state tax exemption (form 2663 of your income tax return).

In addition to this unique 1031 exchange rule, New York is also a highly taxed state in comparison to the average taxes of other states. This fact adds pros and cons to property purchases, such as higher fees, which can reduce your overall income from the investment. You’ll want to carefully assess and map out any investment property purchases in New York.

Step 5: Due Diligence and Financial Considerations

When it comes to a 1031 exchange, there’s more than just assessing replacement properties that require thorough due diligence and an assessment of your finances. In addition to these considerations, you also need to be aware of the costs of finding and closing on a new property and of something called a 1031 exchange boot.

Specific fees and costs associated with selling and purchasing a property can not be included when claiming your 1031 exchange. Some expenses that can’t be claimed include property repairs from tenant damage, tenant security deposits, realtor service fees, and general property management or repairs.

Not being aware of these ahead of time can lead to an exchange boot, which refers to any cash that may become taxable in the exchange process. This is why carefully examining all financial details is essential for a successful like-kind exchange.

Step 6: Mitigating Risks and Ensuring a Smooth Transaction

Ensuring a smooth transaction with as few risks as possible requires a great deal of careful planning. You want to ensure you’ve prepared ahead of time to meet the 1031 exchange deadlines, have found a suitable intermediary, have applied for a New York state tax exemption, and are aware of costs that might trigger an exchange boot.

If you’re planning a 1031 exchange, start looking for replacement properties early and get in touch with an expert who can help walk you through the complexities of an exchange and accurately answer your exchange-related questions.

Step 7: Future Trends and Considerations

1031 Exchanges have been subject to debate and have been considered to be removed throughout their 103-year history. Even today, the Biden administration has considered limiting who is eligible for this exchange to help fund public services. These potential changes to this tax deferment highlight the importance of staying current on policies and regulations that may impact this tax tool.

As with any investment, you’ll also want to stay up to date on the market, and within the state of New York, the market has seen many fluctuations in recent years (as most markets have had in a post-pandemic world). For instance, New York City has seen changes to its commercial property market directly related to the pandemic, which will continue to shift and shape future decision-making.

Add in the fact that climate change is impacting financial markets in a number of ways, and you’ll realize that the markets are constantly in flux and that you’ll want to carefully evaluate these before making any significant financial moves.

Conclusion

A 1031 exchange in New York has great potential, even for beginners. It allows you to grow your investment portfolio while minimizing costs associated with the growth. To complete an exchange successfully, it’s important to keep the following steps in mind:

  • Assess whether or not you qualify for a 1031 exchange, and if you do, if this is the right fit for your financial goals
  • Familiarize yourself with replacement property criteria and budgeting considerations
  • Get in touch with a qualified intermediary who can be your touchstone throughout the process to facilitate the exchange
  • Be aware of New York tax laws and apply for tax exemption if you’re not a New York resident
  • Plan early for every step of the exchange to meet the required deadlines

Contact the Net Lease Finder team for assistance with every step of a 1031 exchange, whether it’s your first exchange or you’re an experienced real estate investor.