As a broker of record for Tverdov Housing here in New Jersey, I personally deal with a lot of investor clients (myself included) who need to execute 1031 exchanges. If you are not familiar with how a 1031 exchange works, or if you are curious how you can do a 1031 exchange with a New Jersey rental property then pay attention! Class is in session.
Now I am not an attorney or accountant, so you will want to speak with your accountant if you are looking to do this. You will also need to speak to your real estate attorney and find a 1031 exchange intermediary.
What is a 1031 exchange intermediary?
In a nutshell, they’re a third party who holds your money from your sale. You don’t touch it the money you made on the sale. You can’t touch it. If you touch it, you have to pay tax on it, got it? Don’t touch it!
Step one is selling your property. This can be done through a realtor who knows the niche market in New Jersey and hopefully gets you every possible dollar your property should command. If you know you want to do a 1031 exchange, you should find an intermediary before closing on the sale of your property and talk with them about what you’re looking to do. When you sell your property and officially close, your 1031 exchange clock begins. You have 45 days to identify up to three properties to roll your money into. The proceeds from your sale go directly to the intermediary. You then need to fill out a form with your intermediary (by the 45 day deadline) that states what properties you have identified to trade into.
Step two is identify property. I know 45 days sounds like a lot but trust me from experience - it is not. If you know you will be looking to do a 1031 exchange you need to start looking for property as soon as your house is listed for sale and in some cases, maybe you identify the property first and then decide to list your house for sale. You will want to work with a realtor who knows what you are looking to do and also knows not to mention anything to the listing agent about your exchange. Why does that matter? If a seller knows that a buyer is buying and doing a 1031 exchange, why on earth would they give you any credits or flexibility with negotiating? They know you have a clock that will expire.
Now with identifying property in New Jersey you can do one of two things – you can either buy a similar property of equal or greater value, or you can buy multiple properties that add up to equal or greater value, as long as the sum of them is not double the price of the property you just sold.
Once you have your properties identified, if you like one of them (or multiple) get them under contract quickly. Ideally, you want to have your identified houses under contract before you even close on your sale. It makes for much less stress and helps you avoid panic buying of a property you might not otherwise purchase.
Step three is closing on your new property. You have six months to do this from the date you closed your original sale. The 45 days and 6 months can confuse people sometimes because one can think you have 6 months from the 45 days. You don’t. 6 months from your sale. Identify a house in 45 of the first 180 days and then close within the original 180 days. Got it?
Here at Tverdov Housing we help investor clients do 1031 exchanges all the time and we also explain this concept to many people selling investment property with us who didn’t even know about it. We believe in helping people build massive wealth. How do you think people get to owning the building Home Depot operates out of? Your local Starbucks? Yeah, someone owns the building.
Step four defer till you die. This is a personal preference but at some point you will need to pay tax on your gains, unless you die. I have had some clients over their entire real estate investing career 1031 exchange into a new property then after a few years sell that property and roll the proceeds into another new property. Rinse and repeat. When they pass away their kids will inherit the properties at a stepped up basis, meaning the government doesn’t care that Mom and Dad paid X for the property 10 years ago, the government (at least as of this writing) will value it at Y. Kids sell. Very little or sometimes no taxes paid. Mind blown?
We help clients on the buy and sell side execute their 1031 exchange transactions every year here in New Jersey and I have also done it myself several times. It is one of the most powerful wealth creation tools in the IRS code. If you are looking to sell investment property in New Jersey and want to consider doing a 1031 exchange, please feel free to reach out to us to see if we can help you. We are not commercial brokers. We stick with single family, multi-family and small mixed use properties but there are plenty of 1031 exchanges transactions in New Jersey that take place in those subgroups. What are you waiting for? Come build your wealth with us today!