Can you 1031 exchange a Co-op apartment in New York

Question

We have a Co-op apartment that used to be our primary residence but now being kept as a rental. We are debating whether to sell it now to take advantage of the 2-out-of-5-year rule on capital gain tax exclusion, or to keep renting it and potentially do a 1031 exchange in the future. My questions are:

1. Do Co-op apartments qualify for 10-31 exchange? I understand in 2017 tax code changed to narrow the range of qualifying properties.

2. If the answer is yes to the above, can you exchange a Co-op apartment for a multi-family house?

3. Does "like-kind" only restrict the nature of the property or also the value? More specifically, can you 1031 exchange a $300k investment property for a $1 million investment property?

Thanks for your input.

Best,

Doris

Rob Pecha · Answer

@Doris Jin Huang you can actually 1031 a Co-op! And what you exchange into does not necessarily need to be another Co-op but investment property held for investment purposes. Best of luck!

Dave Foster · Answer

@Doris Jin Huang, The changes in 2017 only eliminated personal property from 1031.  real estate coops properly crafted (as long as they are used for investment) can be used in a 1031 exchange for the purchase of any other type of investment real estate.

Sam G. · Answer

Hi Doris - with the Sec 121 exemption, you avoid the capital gains tax while you only defer the tax with the 1031 exchange. Unless your capital gains exceed the exemption limits, seems like tax avoidance would be better than tax deferral?

Jag C. · Answer

@Cindy Truong Yes to both questions. DM me if you have questions.

Jag C. · Answer

Hi Doris - I am doing something similar with a coop apartment in Manhattan.

Basit Siddiqi · Answer

@Doris Jin HuangYou should first determine what your gain on the sale would be. This will quickly determine if you should do 121 exclusion or 1031 exchange.Reach out to your accountant to ask them what the potential gain would be. I think you just need to estimate what the sales price would be to get a rough ballpark figure.

Dave Foster · Answer

@Sam Gopal, wow good point I totally missed that sentence.  Obviously tax free is better than tax deferred.  But the depreciation recapture still might be significant.  And that cannot be eliminated in a sec 121 primary residence exemption sale.  So @Doris Jin Huang is probably weighing the options because of anticipated depreciation recapture and or excess gain over the 121 limits.

But luckily for her she doesn't have to choose if she wants.  Her house is a rental now which qualifies it for a 1031 exchange.  But if they have also lived in it for 2 out of the previous 5 years then they also qualify for the primary residence exemption.

So the bottom line is that if the depreciation recapture would be significant.  Or if the gain was more than the $500K primary exemption they could do both!! - take the $500K tax free and 1031 exchange the remaining profit and depreciation recapture.

Jason Lee · Answer

The sales market in Rego Park is relatively strong. There has been very good appreciation over the past couple of years as more buyers look further east along the train lines for affordability. That appreciation is slowing. I don't have a breakout for Rego Park itself but central Queens had a slight YOY increase for Q2. Rents on the other hand were down and inventory was up.

Dave Foster · Answer

@Doris Jin Huang, The actual way the 1031 works is that your basis in the old property transfers into the new property.  So it is a cumulative effect.  But that's really the beauty of the 1031.  You can roll it forward forever.

As long as you never sell the new property you'll never pay the tax.

As long as anytime you sell the property you do another 1031 you'll never pay the tax.

If you end up converting in reverse (later moving into the property as your new primary residence) you'll never pay the tax.

Once you've satisfied the primary residence rules around conversions you'll begin to turn some of the tax deferred gain into tax free gain.

And finally when you die owning the last property all of the deferred gain and associated tax disappears in the step up in basis for your heirs.  So all of the profit is tax free for your heirs.

Defer forever and while you're doing it you get the benefit of the income from the deferred tax.  It's a great gig!

Can you 1031 exchange a Co-op apartment in New York

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