Law Offices Of Michael Resko



March 25, 2014 at 3:49 pm

Are you selling a co-op that you own as an investment property? Hopefully you are selling it for much more than you paid – but if that is the case you may be facing a sizable capital gains tax liability. One way to defer payment of that capital gains tax is to do a 1031 exchange.

The basics of a 1031 exchange are simply that the seller of an investment property may use the proceeds of the sale to purchase one or more “replacement properties”. The seller’s basis (for calculation of gains tax purposes) transfers from the property sold (the “relinquished property”) to the replacement properties and the seller’s capital gains tax liability is deferred until the replacement property is sold or otherwise disposed of. There are important guidelines that must be followed in order to complete the 1031 exchange properly so it is important that you work with an attorney (like us) experienced in these kinds of transactions.

A 1031 exchange is often referred to as a “like kind” exchange because it permits the seller of investment property to buy property of the same kind as the sold property. For 1031 purposes, all real estate is considered “like kind” – so for example you can sell a 3-family house and replace it with an office building. But can you sell a co-op as part of a 1031 exchange? The reason why this is an issue is because when buying into a cooperative (“co-op”), the taxpayer does not acquire real estate but rather acquires stock in the cooperative corporation that owns or leases an entire building. As a stockholder of the cooperative corporation, the taxpayer receives a long-term “proprietary” lease and the right to exclusive possession of an apartment.

That being said, the IRS has consistently ruled that a New York co-op is like kind to real estate, even though ownership is held in the form of stock in a corporation. Sellers of co-ops should feel comfortable that they may use a 1031 exchange to defer any capital gains tax liabilities and facilitate further investment in the real estate market.