What Is a 1031 Exchange?

Many New York landlords own rental property that has appreciated enormously over ten, twenty or thirty years. Selling it can trigger a large capital gains tax bill. A 1031 exchange is the arrangement federal tax law allows investors to “sell the old, buy the new, and pay no tax for now.”

In One Sentence

Under Section 1031 of the Internal Revenue Code, when you sell real property held for investment or business use and, following the rules, replace it with other like-kind real property held for investment or business use, the capital gains tax on the sale can be deferred until you finally sell without exchanging.

“Deferred” does not mean “forgiven”: the tax follows you into the new property, whose cost basis is reduced accordingly. But if you keep exchanging until death, your heirs can generally reset the basis to the value at death, and the deferred tax effectively disappears (see Part 10 of this series).

How Much Tax Can It Save? A Rough Example

A New York City resident bought a three-family rental in Queens in 2010 for $900,000 and took about $250,000 of depreciation. In 2026, the building sells for $2.1 million, with about $130,000 in selling costs.

• Adjusted basis: $900,000 − $250,000 = $650,000
• Taxable gain: $2,100,000 − $130,000 − $650,000 = $1,320,000

Selling outright, without an exchange, a rough estimate for a high-income taxpayer:

This is only an illustration. Actual tax depends on your income, filing status and the law in the year of sale. Have your accountant run the numbers.

With a 1031 exchange, that $500,000 can stay invested in the new property, earning rent and appreciating.

What Property Qualifies?

Qualifies: U.S. real property held for rental, investment or business use, such as a rented house, multi-family building, condo, storefront, office building, warehouse or land. “Like-kind” is broad: a rental apartment can be exchanged for a warehouse, and land for a storefront, as long as both are real property held for investment or business use.

A New York twist: co-ops can qualify. A co-op is legally shares in a corporation, and whether it could be exchanged was once debated. Final Treasury regulations issued in 2020 confirm that stock in a cooperative housing corporation can be treated as real property. But co-ops often restrict subletting, and if the building won’t let you rent the apartment, it is hard to show it is held for investment. Check this before you buy.

Does not qualify:

• Your home (with exceptions and combined strategies; see Part 4);
• Property held primarily for resale, such as a fix-and-flip;
• Property outside the United States, which cannot be exchanged for U.S. property;
• Partnership interests and LLC membership interests (see Part 9);
• Since 2018, personal property (equipment, vehicles, art and so on).

Five Basic Rules

1. Use a Qualified Intermediary (QI). Sale proceeds go directly into the intermediary’s account, and the seller must never touch the money;
2. Identify replacement property in writing within 45 days;
3. Close on the replacement within 180 days (and no later than the due date of that year’s tax return, including extensions);
4. Buy “equal or up.” To defer all the tax, the replacement must cost at least the net sale price of the property sold, and all the net proceeds must be reinvested (see Part 7);
5. Same taxpayer. The seller and the buyer must be the same taxpayer for tax purposes (see Parts 6 and 9).

Did the 2025 Federal Tax Law Change Anything?

No. The federal tax law signed on July 4, 2025 (often called the “One Big Beautiful Bill Act”) preserved 1031 exchanges, as well as the step-up in basis at death. New York State income tax generally follows the federal 1031 rules.

But note: a 1031 exchange defers income tax only. It does not eliminate transfer taxes. New York State and City transfer taxes are still due on the sale.

Attorney’s Insight

A 1031 exchange is one of a landlord’s most powerful tax tools, but its procedural and timing demands are nearly unforgiving: miss a day, or let the money pass through your hands once, and the whole exchange can fail. From an attorney’s perspective, three points deserve emphasis:

• Decide whether to do a 1031 before you sign the sale contract. The contract needs a clause requiring cooperation with the exchange, and the exchange agreement must be signed before closing;
• Think first about what you will buy. Good New York properties are competitive, and finding a suitable replacement within 45 days is not easy. Many owners sell smoothly and then get stuck because they can’t find a replacement;
• A 1031 is not right for everyone. If the gain is modest, you plan to leave real estate investing in retirement, or financing on the new property is unattractive, simply paying the tax may be reasonable. It is best to run the numbers with both your attorney and your accountant.

Attorney’s perspective

We usually start by confirming three things: whether the property is held for investment or business use, who holds title, and what you plan to buy. Those answers determine whether a 1031 exchange works and what other planning should go with it.

For advice about your own situation, call +1 718-218-5805 or schedule a consultation. We meet clients in Flushing and Manhattan, in English or Chinese.

Series overview

This article is for general information only and is not legal advice. Reading it does not create an attorney-client relationship. For advice about your situation, please contact us.

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