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Identifying New York 1031 Investment Properties
It’s no secret that residential real estate is a great form of investment
and a wonderful way to put your money to work for you, building equity and boosting
your net worth. There’s another benefit to real estate investing that
has helped countless people maximize real estate transactions by eliminating the
federal capital gains tax.
It’s called a 1031 Tax Deferred Exchange, named for the Internal Revenue Code
that makes such exchanges possible. The basic premise of Tax Deferred Exchange
is that you may avoid all federal capital gains taxes from the sale of residential
real estate if you use the proceeds to buy “like kind” real estate of
greater value.
There are a few very important requirements that you must strictly adhere to in
order to complete a successful Tax Deferred Exchange. At every step of the
way, we highly recommend that you have access to professional advice. A mistake
could be very costly.
The most important premise for a Tax Deferred Exchange is that the seller may not
receive money for the initial sale in any way, shape or form. Instead, the
seller must select an IRS-approved middleman called a “qualified intermediary.”
The intermediary receives the proceeds of the initial sale and deposits them in
a certified bank account.
Once the first property is sold, the IRS allows 180 days to complete the Tax Deferred
Exchange. Qualified replacement properties must be identified within the first
45 of those 180 days, so act quickly. When you have identified a qualified
investment –a replacement property that is similar but more valuable than
the relinquished property, the intermediary completes the purchase and transfers
the new property back to you.
If you follow all the steps of a 1031 investment, you will pay no capital gains
taxes, saving thousands of dollars. It’s truly a fantastic way to invest
in residential real estate. Just be sure you execute every step correctly
and within deadline.
1031 Exchange Requirements
Timeline Requirements
Measured from when the relinquished property closes, the Exchanger
has 45 days to nominate (identify) potential replacement properties and 180 days
to acquire the replacement property. The exchange is completed in 180 days, not
45 days plus 180 days.
Identification Rules
As an Exchanger, you are required to provide in writing an “unambiguous description”
of the potential replacement property prior to midnight on the 45th day (after the
close of the first relinquished property). A legal description or property address
will suffice. If you wish to identify or purchase multiple properties, you must
follow one of the following guidelines:
- Identify up to three properties of any value with the intent of purchasing at least
one.
- Identify more than three properties with an aggregate value that does not exceed
200% of the market value of the relinquished property.
- Identify more than three properties with an aggregate value exceeding 200% of the
relinquished property, knowing that 95% of the market value of all properties identified
must be acquired.
A submitted purchase agreement is considered a sufficient identification.
Any property purchased and closed within the 45-day time period qualifies as identification.
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