A Section 1031 exchange lets investors sell real property held for business or investment and reinvest in other like-kind real property while deferring capital gains tax. For Brooklyn owners of rentals, mixed-use buildings and development sites, it can be a powerful planning tool. It also runs on strict deadlines, so the sale of your current property and the search for your next one need to be coordinated from the start. That coordination is where a broker who understands the process helps most.
Who Does What in a 1031 Exchange
- Real estate broker (555 Properties LLC). Prices, markets and sells your relinquished property; helps you find and evaluate replacement property; keeps both transactions on schedule.
- Qualified intermediary. Holds the sale proceeds so you never take control of them, and prepares the exchange documents. Engage one before your sale closes.
- Accountant or tax attorney. Advises on whether an exchange fits your goals, how much tax could be deferred and how to report it.
- Real estate attorney. Negotiates contracts for both the sale and the purchase, including language that supports the exchange.
The Timeline
Identification Rules
Within the 45-day window, replacement property is generally identified under one of three rules:
- Three-property rule: identify up to three properties of any value.
- 200% rule: identify any number of properties whose total value does not exceed twice the value of the property sold.
- 95% exception: identify more, but acquire at least 95% of the total value identified.
Your qualified intermediary and tax advisor will confirm which rule fits your plan. For the details, see the IRS instructions for Form 8824.
Properties We Help Sell and Find
- Two to four family homes and brownstones held as rentals. See why 2 to 4 family homes attract buyers.
- Multifamily and walk-up buildings. See the Brooklyn multifamily outlook.
- Mixed-use and retail. See Brooklyn retail and mixed-use buildings.
- Development sites. 555 Properties represented the seller of the 537 East New York Avenue development site in Crown Heights. See the Crown Heights commercial update.
Common Pitfalls to Avoid
- Touching the money. Receiving the proceeds yourself, even briefly, can end the exchange.
- Missing deadlines. The 45 and 180 day periods generally cannot be extended for ordinary delays.
- Boot. Cash left over, or a reduction in mortgage debt, can be taxable.
- Related parties. Exchanges with family members or related entities have special rules.
- Primary residences. A home you live in does not qualify.
Recent 555 Properties Sales
Our recent Crown Heights sales include 1337 President Street ($5,000,000), 1434 President Street ($2,500,000), 1375 Carroll Street ($2,200,000, legal two-family) and 1659 President Street ($1,670,000, legal two-family). See all recent sales.
1031 Exchange FAQ
Is Valerie Sebbag a qualified intermediary?
No. A 1031 exchange requires a qualified intermediary to hold the sale proceeds. 555 Properties LLC acts as the real estate broker: we market and sell your relinquished property and help you find replacement property. Your qualified intermediary, accountant and attorney handle the exchange documents and tax advice.
How long do I have to complete a 1031 exchange?
Generally, you must identify replacement property within 45 days of selling and complete the purchase within 180 days, or by your tax return due date if that is earlier. These deadlines are strict.
Can I exchange a Brooklyn rental for a different type of property?
For real estate, like-kind is broad. Investment or business real property can generally be exchanged for other investment or business real property, such as a mixed-use building for a multifamily building. Your tax advisor should confirm your situation.
Does my primary residence qualify?
No. A home you live in as your primary residence does not qualify for a 1031 exchange, though other tax rules may apply to its sale.
Read our full guide to selling commercial property and the 1031 exchange and how investment sales work, see our 1031 exchange overview and commercial and investment sales, or request a private valuation of the property you plan to sell.
