The Deal Behind the Deal: 1031 Exchange Edition
We will be walking through the logistics and steps that take place when embarking on a complex 1031 Exchange. We’ve asked our own agents at Town & Country about how they themselves completed a 1031 Exchange on the North Fork amidst a global pandemic.
What is a 1031 Exchange?
A 1031 exchange is a way to defer capital gains tax when selling an investment property by reinvesting those profits into another investment property or properties that qualify as like-kind.
What are the benefits?
To defer capital gains tax, allowing for more liquidated assets to invest in a replacement property or properties.
Lingo to Know:
Like-Kind Property – Property that is the same nature, class or character the grade doesn’t matter
Qualified Intermediary – a facilitator of the 1031 exchange, that is removed from the deal in any other way. They hold the proceeds of the sale until the replacement property is purchased.
Commit to a 1031 Exchange
Find a Qualified Intermediary
List & sell your existing investment property
The proceeds of the sale move to the Qualified Intermediary
Identify your replacement property within 45 days
Close on your replacement property within 180 days
The Qualified Intermediary transfers proceeds of sale to sellers
Celebrate a completed 1031 Exchange
Our 1031 exchange story starts with our own CEO and Real Estate Broker of Town & Country, Judi Desiderio. Having been in the real estate business for over 30 years, Judi has seen and executed her fair share of 1031 Exchanges but this one transpired right before her eyes.
This past spring Desiderio chose to pursue selling her Southold property – that she bought nearly 20 years ago. Knowing she wanted to reinvest on the North Fork, a 1031 seemed like a great option. Desiderio expressed, “There is great potential for appreciation on the North Fork. It has only up to go.” The drive for the 1031 she explained, like most, was to defer tax consequences and keep her assets liquidated.
Moving forward, the deal stayed in-house with listing agents, Jeanmarie Bay and Maryse Bransfield of our T&C’s Greenport office. Bay was experienced with 1031 Exchanges and happened to have just closed on one in Southold.
This spring the right buyer emerged. Jeanmarie explains, “When the market started to pick up, we heard from someone who wanted the property and had kept an eye on it since going on the market. Eventually, he came to a price Judi accepted. He was so eager to get into the property, he even leased it while waiting for it to close.”
With the first property closed, the profits of the sale were now in the hands of Qualified Intermediary, Zach Kramer. Zach is a tax escrow attorney, removed from the deal, making him qualified for the part of holding the proceeds of the first sale until they need to be transferred to the new sale.
Fulfilling a 1031 Exchange, Judi knew she had 45 days to identify her next investment property and 180 days to close on it. She was looking for a like-kind property which is determined by the similar nature, not the quality or grade of the property. It gave her a wide range of options with the stipulations of not being used as a primary residence and having to be in the U.S. to qualify.
That being said, the search was on and she was expressing this to Mattituck Office agent, Nicholas J. Planamento over a casual work lunch. Planamento immediately thought of the perfect property that had just emerged on the market, with plenty of history, down the road in Cutchogue. “Knowing your inventory is key to real estate sales,” says Nicholas who drove Judi right from lunch to the distinctive red, 1840s renovated barn on North Street.
Within minutes of seeing the property, Judi offered full price. It had everything Judi was looking for in a multi-use space with a central location and an abundance of history, allowing for unique residential and commercial potential. Prior, it was the noted artist Jacqueline Penney’s studio and gallery.
A bidding war ensued and Judi prevailed. After that, the deal came together quickly. As soon as the ink was dry on the Cutchogue property, Judi had a new tenant from California in the space thanks to Nicholas.
We asked Zak Kramer, intermediary of the deal to weigh in on the logistics of the exchange, “Judi sold a property to reinvest in another one and saw it as a tax deferred exchange,” Kramer said. “The first property increased in value and the Capital Gains Tax would be substantial. So, the second property was almost the same cost, just about 10% greater. She is able to defer the tax until she ‘cashes out’ the investment years from now.”
This was an ideal scenario for all parties involved; Judi was able to reinvest on the North Fork and it was a team win with 4 Town & Country agents to see it through. Kramer expressed, “This was the ideal scenario. The agents involved had it all lined up perfectly. It was seamless. Judi’s attorneys and real estate agents were fantastic. They did everything you’re supposed to do.”