New York City 1031 exchange attorney Natalia Sishodia releases a new article (https://sishodia.com/new-york-1031-exchange-attorney-explains-how-to-defer-taxable-gain-on-property/) discussing the impact of a 1031 exchange in deferring capital gains tax on a real estate transaction. Attorney Sishodia cites Section 1031 of the Internal Revenue Code where a provision for an exchange of productive property is allowed. In a 1031 exchange, tax gains on property that would otherwise be sold (Relinquished Property) are instead deferred. This allows the owner of the property to have more funds in purchasing another property (Replacement Property).
According to the New York City 1031 exchange attorney, “The rationale behind the tax deferral is that the taxpayer’s investment is still the same, only form has changed (e.g. vacant land exchanged for apartment building) and it would be unfair to force the taxpayer to pay tax on a “paper” gain.”
The attorney enumerates 4 types of exchanges, Simultaneous Exchange, Delayed Exchange, Build-to-Suit Exchange, and Reverse Exchange. In a Simultaneous Exchange, the transfer of ownership of the relinquished property and the replacement property occurs at the same time. For a Delayed Exchange, the most common, according to attorney Sishodia, there is an existing time gap between the transfer. Treasury Regulations have strict time limits that need to be met for the exchange to be recognized by the government.
In a Build-to-Suit Exchange, the taxpayer is allowed to make improvements on the Replacement Property using the exchange proceeds. For a Reverse Exchange, the Replacement Property is acquired before the transfer of the Relinquished Property.
For an exchange to be valid, attorney Sishodia emphasizes that requirements under Section 1031 should be met. Among the requirements, is the imposition of a Like-Kind standard in which both properties must be held either for use in trade, business, or as an investment. In addition, the Qualified Use Test requirement states that property acquired for immediate resale or a taxpayer’s personal residence is not allowed to be held in a 1031 exchange.
Time requirements also exist in a 1031 exchange. “A taxpayer is required to identify the target Replacement Property within 45 days of closing of the sale. Properties acquired within the 45-day designation period are deemed to be identified. Replacement Property must be designated in a written document, unambiguously described, signed by the taxpayer, and received by the Qualified Intermediary on or before the 45th day,” attorney Sishodia further explained.
Lastly, attorney Sishodia highlights the complicated qualifications and processes that taxpayers are required to meet in order to have a valid 1031 exchange. Attorney Natalia Sishodia notes the importance of hiring a qualified 1031 exchange lawyer to be able to save time and money.
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