Investing in Manhattan real estate using 1031 Exchange strategy
Posted by Wei Min Tan on March 20, 2023
Manhattan real estate is viewed as an investment safe haven, and investors usually try to maximize tax efficiency when buying and selling. One way seasoned investors deal with taxes at time of sale is via a 1031 Exchange strategy.
The 1031 Exchange tax code allows investors to sell one property and reinvest the proceeds in another “like-kind” property without incurring capital gains taxes at the time of sale. This does not mean it eliminates capital gains tax. Rather, the investor can defer taxes on their investment gains and use funds that would otherwise be used to pay capital gains taxes to invest in property.
Read Wei Min’s article: Property Investment in New York
To qualify for a 1031 Exchange, the property being sold and the one being purchased must be “like-kind“. This means they must be of the same nature or character, even if they differ in quality or grade. The 1031 Exchange applies to investment property only so both properties must be for investment. For example, an apartment complex can be exchanged for a retail space, or a rental condo can be exchanged for a vacation rental property.
Read Wei Min’s article: Buying a vacation or second home in Manhattan
Relinquished and Replacement Property
The property being sold is the “relinquished property,” and the one being purchased is the “replacement property“. To qualify for a 1031 Exchange, the replacement property must be of equal or greater value than the relinquished property, and the investor must have owned the relinquished property for at least one year. The replacement property must be identified within 45 days of the sale of the relinquished property and the transaction must close within 180 days.
An investor who sells a retail space can buy a residential condo as replacement property because they are both “like-kind” in that they are both for investment.
A qualified intermediary (QI) is a third-party company that helps facilitate the 1031 Exchange process. The QI holds the proceeds from the sale of the relinquished property and uses them to purchase the replacement property on behalf of the investor.
Read Wei Min’s article: Strategy of investing in distinguished prewar condos
Exchange Process Timeline
A 1031 Exchange process has a strict timeline that must be followed to qualify for the tax deferral. Once the relinquished property is sold, the investor has 45 days to identify potential replacement properties and 180 days to complete the purchase of the replacement property.
Investors have several variants of the 1031 Exchange strategy to choose from, such as the reverse 1031 Exchange or the improvement 1031 Exchange. The former allows investors to purchase a replacement property before selling the relinquished property, while the latter allows them to use the proceeds from the sale of the relinquished property to make improvements on the replacement property.
What We Do
We focus on global investors buying Manhattan condos for portfolio diversification and long term return-on-investment.
1) Identify the right buy based on objectives
2) Manage the buy process
3) Rent out the property
4) Manage tenants
5) Market the property at the eventual sale