The 1031 Exchange of a Lifetime


A CitrinCooperman client recently sold a building in the East Village for roughly $35 million, having entered the property decades ago on a much, much lower basis. 

As the neighborhood exploded, prices soared. The family wanted out of its old investment and into a new one, but with capital gains taxes now up to 20 percent, a 1031 exchange seemed like the only way to go.

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Owner-occupiers in neighborhoods like Long Island City, Queens (pictured) and Williamsburg, Brooklyn are incentivized to move out.
Owner-occupiers in neighborhoods like Long Island City, Queens (pictured) and Williamsburg, Brooklyn are incentivized to move out.

“These owners wanted to go ahead and live off of their next investment for the rest of their lives,” said Mark Mindick, a partner at CitrinCooperman. “The deal came to us, and we put them in six different deals. There’s a tremendous amount of work that goes on there from a consulting perspective and from a technical perspective on the accounting side.”

Many experts and real estate professionals predicted that the number of 1031 exchanges would increase after the start of 2013, when capital gains increases went into effect. They were right, and tax and accounting professionals told Commercial Observer that the last six months in particular have been a hotbed of activity.

“People who were selling at the end of 2012 were taking their money and running,” said Matthew Bonney, also a partner at CitrinCooperman. “The bump in the tax rate really started driving 1031.”   

The rise in popularity is nowhere more apparent than on the frontlines at the city’s tax and accounting firms, where tax professionals help investors navigate not only the new capital gains terrain in the event of an outright sale, but also the complex 1031 transactions that more often than not involve several properties, if not entire portfolios.  

Owner-occupiers who previously unearthed gems in once-underdeveloped neighborhoods view 1031 as a more cost-efficient exit from a property, especially as offers from developers spike to levels they simply cannot resist.  

“We’re seeing more movement in the outer boroughs,” said Margolin, Winer & Evens partner John Schmuck, who on a cold morning early last week was with clients surveying properties in Williamsburg, Brooklyn, and Long Island City, Queens.

“It’s amazing how much has happened right across the river over the last five or 10 years and how much is going on currently… and it looks like it’s going to continue,” he said.  

David McKelvey, a partner at Friedman LLP, has seen also seen a lot of 1031 activity in Long Island City, where he envisions an additional push for residential development. As affluence moves in, some owner-operators are tempted to stick around, while others can’t resist the temptation to move away as the incentives line up.   

“They can relocate their business and find a less expensive building or rental space elsewhere,” he said, noting that areas just outside the city are offering additional tax incentives for companies fostering job growth. “They could go to Nassau, Suffolk, New Jersey or different parts of New York and get all kinds of incentive credits that they will also profit from.”

During the 1031 process, tax professionals generate the terms of deals and joint ventures. They vet sponsors, advise clients on the financial structuring of deals and keep risk in check. Issues may also arise when family members and business partners do not agree on the decision to exit investments. And, of course, they must identify replacement properties that make the most sense for the client. They have 180 days from the time the first property is sold to close on a new property (or properties). 

“Sometimes the challenge, especially in pockets of really hot markets, is finding a replacement property,” Mr. McKelvey said. “There’s a lot of stress that takes place in getting that closed within those 180 days.”