Every week, Mansion Global poses a tax question to real estate tax attorneys. Here is this week’s question.
Q: Regarding withholding tax to be paid on the sale of a property, does the U.S. government still have the replacement property rule, which would defer taxes on any gains?
Yes, it is still possible to do a tax-free like-kind exchange with a replacement property. However, said Eric Dorsch, a New York attorney with Kozusko Harris Duncan, "the rules surrounding this kind of tax-free exchange are complex, and careful attention must be paid to ensure the transaction qualifies."
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In brief, Mansion Global’s experts said, the replacement property rule—otherwise known as a Section 1031 exchange—applies only to investment properties, not to residential properties that are for personal use by the owners. An apartment that is being rented out would qualify, but, "you cannot be living it in yourself," said Edward Mermelstein, managing partner at the law firm of Rheem, Bell & Mermelstein in Manhattan.
Getting a deferral, Mr. Mermelstein said, doesn’t require any special paperwork. "Technically," he said, "you don’t have to do anything actively other than designate it as an investment property for tax purposes."
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