Sishodia PLLC - 1031 Lawyer
A 1031 exchange is one where one investment property is exchanged for another, thereby deferring capital gains. The rules concerning 1031 exchanges can be strict, however. Getting the help of a skilled New York City 1031 exchange lawyer can help prevent mistakes, as well as save time and money. At Sishodia PLLC, New York real estate attorney Natalia Sishodia and our experienced 1031 lawyers can guide and advise you if you are interested in taking advantage of a 1031 exchange. To schedule a free consultation, call us today at (833) 616-4646.
The term 1031 exchange derives from Section 1031 of the U.S. Internal Revenue Code. This tax code allows an owner of a piece of an investment property the ability to defer paying capital gains by exchanging their investment property with one of “like-kind.” In a 1031 exchange, the proceeds from an investment property are reinvested into a different investment property in an exchange instead of a sale/purchase.
Because proceeds from a sale are subject to significant capital gains taxes, instead of the funds from a sale going to the seller, they are transferred to another investment property via an intermediary. That intermediary then transfers them to the seller of a replacement property, thereby transacting an exchange under the rules of Section 1031.
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A 1031 exchange allows a real estate investor to buy and sell property without being subject to capital gains taxes. These taxes are deferred until the final sale of an exchanged property.
Right now, capital gains taxes are high (22 to 30 percent) and can substantially eat into any profit realized in the sale of an investment property. These taxes may trend even higher in the future.
If you are a real estate investor who is considering purchasing a replacement investment property through a 1031 exchange, real estate lawyer Natalia Sishodia and the experienced New York 1031 attorneys at Sishodia PLLC would be happy to advise and guide you. To schedule a no-cost appointment, call us now at (833) 616-4646.
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To get the full benefit of a 1031 exchange, the exchange must meet important guidelines:
If you are considering a 1031 exchange, you should get the assistance of an experienced New York 1031 lawyer. At Sishodia PLLC, real estate lawyer Natalia Sishodia and our team of experienced New York 1031 attorneys can guide you each step of the way to ensure that your exchange properties qualify and you get the important tax benefits of your exchange. To schedule a no-cost consultation, call us today at (833) 616-4646.
Depending on what type of exchange you are making, requirements and timing can vary.
While a mortgage is allowed on both sides of the exchange, if the mortgage on the replacement property is less than the mortgage on the relinquished property, that difference must be considered within the parameters of the exchange.
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A qualified intermediary is a critical player in a 1031 exchange. During the exchange of property, the investors engaged in the exchange cannot, at any time, receive any proceeds directly. All funds will be transferred through a qualified intermediary. The intermediary will collect funds from the sale of the relinquished property and hold it in escrow. These funds will then be used in the purchase of the replacement property.
A qualified intermediary under the IRS code cannot be related to you, or anyone who has acted as an agent on your behalf for the previous two years. While there aren’t any specific licensing or other educational requirements to act as a qualified intermediary, it should be someone who is experienced in 1031 exchanges.
An experienced 1031 lawyer, real estate attorney, real estate agent or broker, investment professional, CPA, or another financial professional can be a good choice as a qualified intermediary. At Sishodia PLLC, founding attorney Natalia Sishodia and our skilled team of 1031 lawyers have extensive experience as qualified intermediaries in 1031 exchanges.
Under Section 1031, if the financial investment is similar between properties, but the form of the investment has changed, the rationale is that the taxpayer should not be required to pay taxes on a gain that is immediately reinvested through an exchange of properties.
There are multiple reasons why a real estate investor may want to take advantage of a 1031 exchange.
While their investment grows, the investor will only be required to pay one capital gains tax at the final sale of an exchanged property, typically at a long-term rate. If done correctly, there is no limit to how many times a 1031 exchange can be utilized. At Sishodia PLLC, our skilled 1031 lawyers can help you understand how a 1031 exchange may be advantageous to you. To schedule a free appointment, call us at (833) 616-4646.
The IRS provides clear guidelines regarding 1031 exchange properties, with one essential requirement being that both the relinquished and replacement properties must be intended and utilized as investment properties to qualify for tax deferment under Section 1031. However, the specific duration for which these properties must be held is not explicitly defined by the IRS. Instead, the IRS states that a “sufficient period of time” is required, leaving room for interpretation and potential uncertainty regarding qualification requirements.
The holding period for a 1031 exchange property is made by the IRS on a case-by-case basis, as they do not establish definitive rules for it. However, previous IRS rulings suggest that a holding period of two years is generally considered sufficient to satisfy the qualified use test. In addition, some court rulings have adopted an even more flexible stance regarding this issue.
Numerous tax advisors recommend that property owners involved in 1031 exchanges adhere to a minimum holding period of one year. They also suggest keeping comprehensive documentation of rental income, depreciation, expenses, and other relevant evidence to demonstrate the property’s status as an investment property. It is important to note that if you intend to utilize your replacement property as a primary or secondary residence in the future, it must also adhere to the IRS’s safe harbor rule, which entails meeting specific requirements outlined by the IRS.
If you’re looking to postpone capital gains tax on appreciated assets but a 1031 exchange doesn’t fit your situation, a Deferred Sales Trust (DST) might be the solution you need. A DST operates under the principle of an installment sale, allowing you to break down the sale of an asset into multiple payments over time, which can defer the capital gains taxes associated with each installment.
Unlike the 1031 exchange, a Deferred Sales Trust offers versatility beyond real estate transactions. Through a DST, your asset is placed into a trust overseen by a third party. Serving as a trustee, this third party handles the sale of the asset and disburses payments to you over a pre-agreed period. During this time, capital gains taxes are deferred until you receive the installment payments. Notably, the trust can reinvest these funds, potentially generating additional income as you defer your capital gains tax obligations. This can also be particularly useful when the asset has significantly appreciated.
It’s important to note that while DSTs can offer a tax deferral advantage, they also involve careful planning and adherence to tax regulations. It’s advisable to seek guidance from an experienced New York 1031 lawyer to determine if this approach best fits your situation and facilitate the process.
The IRS has very specific rules concerning 1031 exchanges. Any errors can result in you having to pay capital gains taxes on the relinquished property. When setting up a 1031 exchange, there are some common mistakes that investors make that must be avoided. These include:
An investor wanting to use a 1031 exchange should review all matters with their legal and tax advisors to ensure that qualifications are met, and their objectives will be served through the exchange.
While an investor can make use of 1031 exchanges as good, tax-deferred ways of building wealth, many complexities must be considered. Getting the assistance of a skilled New York 1031 lawyer can help you understand the transaction and stay within the rules.
Hire a 1031 exchange attorney when selling an investment property to defer capital gains taxes. An attorney ensures compliance with IRS rules, drafts legal documents, and prevents costly mistakes. Hire one before selling to structure the exchange properly and avoid disqualification.
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At Sishodia PLLC, New York City real estate attorney Natalia Sishodia and our team of experienced 1031 lawyers will help you understand how to take advantage of a 1031 exchange and assist you in navigating the exchange to avoid making critical mistakes. We will help analyze the best structure for your exchange, draft and review any agreements and documents, and ensure that your exchange is executed within the applicable tax rules and time constraints. Call us at (833) 616-4646 or contact us on our website to schedule a consultation.
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