14 Nov Can I save taxes when I sell my co-op and buy another?

Q. I’m looking to sell my co-op in Rutherford for another investment property in Arizona. Can this be done? I was told in Arizona that because it’s a federal code, that I could not do a 1031 with a co-op. Is this true? They say it has to be real property and co-op would not count. If that is the case, for out-of-state. then I would be interested in doing 1031 exchange in New Jersey.
— Thinking about it

A. Sounds like you’re entering into an exciting new opportunity.

Let’s go over the tax code.

Internal Revenue Code Section 1031 allows taxable gains to be deferred if the property sold is exchanged for “like-kind” property, said Gerard Papetti, a certified financial planner and certified public accountant with U.S. Financial Services in Fairfield.

“The property sold must be business or investment property, not personal use property,” he said. “Like-kind refers to the nature or character of the property as there is a broad range of properties that can be exchanged tax-free, such as raw land for an apartment building.”

The key is that both properties are held for business or investment purposes, he said.

Pursuant IRS Publication 544, co-ops do qualify for like-kind exchanges under federal law, Papetti said.

“If you are a New Jersey resident, the exchange of a New Jersey co-op would qualify for tax-deferred exchange treatment under both federal and New Jersey law, regardless of the state the property being exchanged for is located,” he said.

Therefore, as long as your Rutherford co-op qualifies as business or investment property, you can exchange the co-op via a 1031 tax-free exchange and defer any taxable gain for both federal and New Jersey tax purposes, Papetti said.

There are specific rules that must be followed to complete a like-kind exchange, so please consult your tax advisor to make sure you comply.

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This story was originally published in November 2024.

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