New York investors frequently use 1031 exchanges to acquire real estate investment property in transactions that eliminate most, if not all, taxes. The structure of 1031 exchanges can be complex. However, even at their simplest, they still present pitfalls that investors encounter when they don’t understand the rules for acquiring properties in tax-free exchanges, or the basic principles for buying investment properties. Working with an experienced Qualified Intermediary (QI) such as Westwood Net Lease Advisors is the best way to avoid these pitfalls.
RECEIVING BOOT
“Boot” is a term for elements in a 1031 transaction that are taxable. The most common types of boot are improperly received cash and cash equivalents, property that is not “like-kind,” financial liabilities of the seller that the exchange partner assumes (e.g. liens), and financial liabilities for the relinquished property that the exchange partner assumes (e.g. mortgage). In some cases, boot is received purposefully, but it is typically avoided to prevent taxation. Considering the myriad ways in which it can be received, working with an experienced QI is the best way to avoid receiving boot.
USING SALE PROCEEDS AS COLLATERAL
For a 1031 exchange to remain tax-free, the seller must avoid taking constructive receipt of proceeds from the relinquished property during the exchange period. Having a QI hold the proceeds until a replacement property is found is the easiest way to do this. However, when the QI holds the funds, the seller must avoid using them as collateral for a loan. Otherwise, the IRS will consider the loan amount taxable. When the seller borrows against the proceeds from the relinquished property, the IRS views the transaction as the seller taking constructive receipt of funds from the sale.
NOT EXAMINING THE LEASE
New York Real estate investment property is often purchased with the intent to recoup the investment through rental income, but the ability to do so depends on the terms of the lease. For example, the time remaining on the lease, which expenses the tenant pays, and whether the lease rate is high, low, or average for the market play a role in how quickly the investment is recovered, and how profitable the property is after the ROI period. Working with a broker that has access to a proprietary database of properties the easiest way to find properties that have the best lease terms.
CALL WESTWOOD NET LEASE ADVISORS
If you plan on buying investment properties in New York using a 1031 exchanges, it is important to avoid receiving boot, using sale proceeds as collateral, and investing in a property whose lease terms are not optimal, as these things can detract from the value of the investment. Using our real estate expertise and proprietary database of on-market and off-market properties in New York, Westwood Net lease Advisors helps investors avoid the pitfalls above, and acquire the best properties on the best terms, with the least amount of exposure.
