Are you on the clock with a 1031 and eyeing Downtown Brooklyn? You are not alone. DTBK offers a mix of multifamily, mixed‑use, and commercial assets, but the timelines and rules can feel unforgiving. In this guide, you will get a practical playbook to hit the 45‑day and 180‑day deadlines, weigh DSTs against direct purchases, and coordinate your lender, attorney, and Qualified Intermediary with confidence. Let’s dive in.
1031 basics you must nail
Section 1031 of the Internal Revenue Code allows you to defer capital gains taxes when you exchange real property held for investment or business use for like‑kind real property. U.S. real property is broadly like‑kind to other U.S. real property. The same taxpayer who sells must acquire the replacement property.
Two deadlines control everything:
- Identify replacement property within 45 calendar days of your sale closing.
- Complete the acquisition within 180 calendar days of your sale closing or by your tax return due date, whichever comes first.
For identification, you can use the three‑property rule, the 200% rule, or the 95% rule. Identification must be written, signed, and delivered to your Qualified Intermediary or another permitted party. Do not take receipt of sale proceeds. Your QI should hold funds and document every step.
DTBK fit for 1031 investors
Downtown Brooklyn is a transit‑rich hub with multifamily, mixed‑use, office, and retail inventory. Investors often target stabilized rentals, new‑construction condos, and street‑level retail in mixed‑use buildings.
In New York, co‑op interests are corporate shares, not fee real property, and can be problematic for 1031 treatment. Condominiums and fee simple interests are typically acceptable like‑kind property. Always confirm your ownership structure and vesting with tax counsel.
Rent regulation matters. Older buildings may include rent‑stabilized or rent‑controlled units, which affects income, financing, and valuation. Review rent rolls, registrations, and any applicable local programs.
Local taxes and closing costs to plan for
A 1031 defers federal taxable gain. It does not erase state and local transfer taxes or recording fees in New York.
- New York State and New York City transfer taxes can apply based on property type and price. Confirm current rates before you sign a contract.
- New York State’s mansion tax of 1% generally applies to residential purchases at or above 1,000,000 dollars. Plan for this at closing.
- New York generally conforms to federal 1031 treatment for income tax purposes, but confirm state details with your tax advisor.
DSTs vs direct purchases in DTBK
What a DST is
A Delaware Statutory Trust holds real estate and issues beneficial interests to investors. Under IRS guidance, DST interests can qualify as like‑kind property if strict restrictions are met. You are a passive investor with limited control.
DST advantages
- Lower minimums let you access institutional‑grade assets.
- Faster, simpler closings can help meet the 45/180 schedule.
- You can diversify across multiple DSTs.
- Passive ownership removes day‑to‑day management.
DST limits
- Limited control over operations, financing, and timing of sale.
- Fees reduce net returns; review the PPM closely.
- Illiquidity and multi‑year holds are common.
- Restrictions generally block new debt or tax‑deferred cash‑out strategies.
Direct purchase advantages
- Full control to execute value‑add, leasing, and refinance strategies.
- Flexible financing options, including bridge and construction loans.
- Potential to apply active management and tax strategies.
Direct purchase challenges
- Higher capital and management requirements.
- Underwriting, title, and financing must fit the 180‑day window.
- Single‑asset concentration risk.
When to choose which
- Choose DSTs when you need speed, diversification, or passive income, or when your proceeds are smaller than typical DTBK purchase prices.
- Choose direct purchases when you want control, value‑add upside, and flexible financing, and you can execute within the timeline.
The practical 1031 playbook
Pre‑sale planning
- Confirm tax and entity fit. Validate same‑taxpayer and vesting with 1031 counsel.
- Engage a Qualified Intermediary before your sale closes. Execute the exchange agreement and wire instructions.
- Decide on a strategy: direct purchase, DST, or a hybrid plan with DSTs as backup.
- If targeting a direct purchase, secure lender preapproval and align underwriting with the 180‑day deadline.
- If targeting DSTs, review the PPMs, subscription windows, minimums, and documentation.
- Build your identification list early. Line up multiple options to protect your timeline.
- Assemble your team: attorney with NYC and 1031 experience, local title company, lender, and a DTBK‑savvy broker.
Day 0: sale closing
- Close the relinquished property sale. The QI receives proceeds. You should not touch funds.
- The QI confirms receipt and starts the exchange escrow.
Days 0–45: identification window
- Deliver written identification to your QI using the three‑property, 200%, or 95% rule.
- For direct purchases, file loan applications, order appraisals, and open title immediately.
- For DSTs, finalize subscription paperwork and confirm funding cutoffs.
- Set a communications plan among QI, lender, attorney, title, and, if applicable, DST sponsor.
Days 46–180: closing window
- Close on identified property or properties. Track identification rule compliance if you have multiple.
- Match vesting. Title should reflect the same taxpayer that sold.
- Ensure contracts permit assignment to the QI if needed.
- Align financing to avoid mortgage boot by equalizing or exceeding prior debt or bringing cash.
- Have the QI wire funds directly to the settlement agent. Provide closing statements and deeds for the QI record.
Post‑closing
- Obtain final exchange documentation from the QI for your tax return.
- Coordinate with your CPA on reporting, depreciation schedules, and tracking deferred gain.
Due diligence checklist for DTBK
- Rent roll and leases, including regulated tenant status.
- Building registrations and any violations with NYC HPD and DOB.
- Zoning confirmation and permitted uses for the specific lot.
- Whether a Certificate of No Harassment could apply to planned work.
- Property tax class and assessment history, including any pending appeals.
Avoiding boot and debt traps
To defer all realized gain, you generally need to buy equal or greater value and take on equal or greater debt compared to what you gave up. Shortfalls may be taxable boot.
Quick checks:
- If your replacement debt is lower, plan to add cash to close the gap.
- Avoid receiving cash or non‑like property from the exchange.
- Confirm final settlement statements reflect correct debt and cash flows.
Identification strategies that work
- Three‑property rule: Identify up to three properties, regardless of total value. Works well for one or two DTBK assets plus a DST backup.
- 200% rule: Identify more than three properties, as long as combined fair market value does not exceed 200% of what you sold. Useful if you want options across multiple buildings or DSTs.
- 95% rule: Identify any number, but you must close on at least 95% of total identified value. Consider this only with tight execution control.
Execution red flags to avoid
- Missing the 45‑day or 180‑day deadlines.
- Taking constructive receipt of sale proceeds.
- Mismatched vesting between sale and purchase.
- Unvetted QI processes or incomplete QI documentation.
- Ignoring rent regulations, local transfer taxes, or mansion tax in underwriting.
How The Holt Team supports investors
You want more than listings. You want a plan that fits your timeline, tax goals, and target asset. Our team brings DTBK market knowledge across condos, mixed‑use, and multifamily, plus a clear, deadline‑driven process. We help you source options, pressure‑test the 45/180 calendar, and coordinate with your QI, counsel, title, and lender so you can close on time.
Ready to plan your exchange into Downtown Brooklyn? Request a Consultation with Unknown Company.
FAQs
What are the key 1031 deadlines for DTBK purchases?
- You must identify replacement property within 45 days of your sale and complete the purchase within 180 days or by your tax return due date, whichever comes first.
Can I use a 1031 to buy a Downtown Brooklyn co‑op?
- Co‑op shares are corporate stock and can be problematic for 1031 treatment; many investors prefer condos or fee simple property and consult specialist counsel before considering a co‑op.
Do NYC and NYS transfer taxes get deferred by a 1031?
- No. Transfer taxes, recording fees, and the New York State mansion tax are separate and typically due at closing even when federal gain is deferred.
How do I avoid boot when financing my replacement property?
- Match or exceed the relinquished property’s value and debt and avoid receiving cash; bring additional cash or structure financing to cover any debt shortfall.
When is a DST better than a direct DTBK purchase?
- DSTs can be helpful if you need speed to meet deadlines, prefer passive ownership, want diversification, or your proceeds are smaller than typical DTBK purchase prices.
What local due diligence is critical for DTBK assets?
- Review rent rolls and regulated status, HPD and DOB records, zoning and permitted use, any CONH requirements, and the property’s tax class and assessment history.
