Is it possible to 1031 Exchange in Different States?

[Bryan Cavellier]

Has anyone 1031 exchanged in different states? (EXAMPLE: I own a property in NY and wanted to buy in GA) Is this possible? Anyone have any stories or experiences exchanging in different states? Love any and all responses! 

[Diane Perry]

A 1031 Exchange is a real estate transaction that takes advantage of a Federal tax law, so the state you do it in is of no consequence. I myself sold a piece of property in New Jersey (raw land) and purchased a property with a house on it in Nashville, TN for my 1031 exchange. Some of the most important criteria are these:

1) Both real properties must be investment properties, and not your personal residence. In my case, I wasn’t sure my land qualified because it was essentially my back yard, but because it was always a separate lot from my house, I was able to still do it because raw land without improvements on it is always considered investment property. It took a while to find trustworthy advice about this but I read the text of the law and it explicitly stated this, so I was lucky.

2) The time you have between selling and identifying the replacement property is very short, and the time you have between selling and purchasing is also short. You can’t identify a purchase or purchases willy nilly until one hits. In other words, there are certain parameters you have to be within when identifying replacements, so if a deal goes south for some reason, after filing the papers that identified that property, you might lose the opportunity to take a 1031 at all. (I didn’t want to take any chances, so I didn’t sell until I had both identified and actually gone to contract on a purchase. It was not easy, since without having my property under contract I had trouble getting a property owner to sign a sales agreement with me. But I am especially risk-averse about some things, and I couldn’t afford to NOT do a 1031 exchange.) Also remember, you can NOT identify more than a certain number of POTENTIAL replacement properties, and they have to be within a certain percentage of value of the old property, and you can’t file this identifying paper and then change your mind. It’s a bit of a tangled web, but if you need more info on it, do your research first, and then you can contact me to help you sort out the current rules. 

3) The tax benefits are severely hampered if you there is any money from your original property that doesn’t get spent on the replacement property, so it’s best to purchase a more expensive one to avoid losing those benefits.

4) It is imperative that you do not receive any money directly from the sale of the original investment property. It may sound funny to pay a 1031 exchange service to simply receive money for you and spend it for you, but it is essential. The 1031 exchange is designed to give you a loophole: You are not considered to be selling and buying, you are simply trading your property for a different one or ones. Thus, you kick any capital gains down the road. 

5) The best part of the law says that once it has been an investment for a certain number of years, you can actually move into it, and once you have owned it for a certain number of years, the capital gains you kicked down the road can be rolled into the capital gains that is exempt as your personal residence. Obviously, this is not something easily done with a commercial warehouse, but theoretically you could do ANOTHER 1031 exchange of the warehouse after the prescribed number of years is up, for a residential home, rent that home out for the prescribed number of years, and then move into IT. In other words, you can exchange the exchange. Each exchange starts the clock again, and you lose the tax benefit if you do not hold and rent out each property for enough time to satisfy the rules.

6) I used a 1031 exchange lawyer in the city that I purchased in. I chose them because they knew what they were doing. Make sure this is a specialization of whomever you use. The rules are complex, and unequivocal. If the exchange attorney makes a mistake and fails to file exactly when and how they are supposed to or if anything else goes wrong, you lose your tax benefits. Mine cost me about $1000 to $1500. In my state there were lawyers who did not specialize in 1031s and they wanted to charge me $3000!

7) If you don’t have significant capital gains on the property you are selling, it may not be worth it to do a 1031 exchange. Mine was ALL capital gains, so I had to make sure I got it or it would have cost me tens of thousands of dollars.

Good luck, and let me know how it goes!

Diane