What a 1031 exchange does
Section 1031 of the Internal Revenue Code allows an investor to defer recognition of gain when real property held for investment or for use in a trade or business is exchanged for other like-kind real property. A personal residence does not qualify, and property held primarily for resale may not either. Whether a particular sale qualifies, and how much gain is deferred, is a tax question for your CPA or tax attorney. The title agency’s role is to execute the closings in a way that supports the structure they design.
The intermediary comes first
In a typical delayed exchange, the investor engages a qualified intermediary before the relinquished property closes. The investor’s rights in the sale contract are assigned to the intermediary, and notice of that assignment is given to the buyer. Sale proceeds then go directly to the intermediary rather than to the investor. If the investor receives or controls the funds, even briefly, the exchange may fail. Tell the title agency at order that an exchange is planned and introduce the intermediary right away.
The 45-day identification period
Starting on the day the relinquished property transfers, the investor has 45 calendar days to identify potential replacement properties in a signed writing delivered to the intermediary or another permitted party. The identification rules limit how many properties may be named and under what conditions, and they describe each property unambiguously, typically by address or legal description. The deadline does not extend for weekends or holidays. Your tax adviser and intermediary should confirm the identification complies before day 45 arrives.
The 180-day exchange period
The replacement property must be received within 180 calendar days after the relinquished property transfers, or by the due date of the investor’s tax return for that year, including extensions, if that comes first. Investors who sell late in the year should discuss this with their CPA, since the return deadline can shorten the window. From a title standpoint, this means the replacement search, commitment, and any curative work should begin as soon as a contract is signed, not after financing is approved.
Vesting and the settlement statements
In general, the taxpayer that sells the relinquished property should be the same taxpayer that acquires the replacement. If an LLC sold, an individual member taking title to the replacement may raise issues, although disregarded entities are often treated differently; confirm the planned vesting with your adviser before the deed is drafted. The settlement statements should show proceeds disbursed to the intermediary on the sale and the intermediary’s funds applied on the purchase, with the exchange documents referenced in the closing file.
New Jersey seller forms and timing
New Jersey requires sellers to complete residency and gross income tax forms at the time a deed is recorded, and those forms include provisions relevant to like-kind exchanges. Nonresident sellers in particular should review them with their tax adviser before closing, because the selections made affect whether an estimated tax payment is collected from proceeds. Bulk sale notices may also apply to investment property. Building these items into the schedule early protects both the exchange and the closing date.
This article is general information about New Jersey real estate transactions and is not legal, tax, or financial advice. Laws, regulations, and fee schedules change; confirm current requirements with your attorney. Crystal Alliance Title is a title insurance agency, not a law firm.
