Thinking about selling a Jersey City multifamily and rolling your gains into the next asset without a big tax bill? You are not alone. Many Hudson County landlords use a 1031 exchange to keep capital working, scale up, or pivot to more passive income. In this guide, you will learn the key rules, timelines, and local details that matter so you can move with confidence and avoid costly mistakes. Let’s dive in.
What a 1031 exchange does
A 1031 exchange lets you defer federal capital gains taxes and depreciation recapture when you sell investment or business real estate and buy another qualifying property. The property you sell is the relinquished property. The one you buy is the replacement property. The rule applies only to real property after 2018, not equipment or personal items. You can review the basics in the IRS overview of like-kind exchanges for real estate.
- Read more on the IRS page: Like-kind exchanges real estate tax tips
The timeline you cannot miss
Two strict deadlines drive every exchange. You have 45 calendar days from the closing of your sale to identify replacement property in writing to your qualified intermediary. You must receive your replacement property no later than 180 days after the sale, or by your tax return due date for that year, whichever comes first. These deadlines are firm and include weekends and holidays.
Identification rules are precise:
- Three-property rule: identify up to three properties, any value.
- 200 percent rule: identify any number of properties with total value up to 200 percent of what you sold.
- 95 percent exception: identify above 200 percent only if you close on at least 95 percent of the total identified value.
For the legal framework on timing and identification, see the Treasury Regulations at 26 CFR § 1.1031(k)-1.
What counts as like-kind in Jersey City
For investment or business use, nearly all U.S. real property is like-kind to other U.S. real property. You can exchange a Jersey City apartment building for a duplex, a larger multifamily, a commercial property, or even land, if the use is investment or business. That flexibility gives you room to consolidate or diversify.
- 2–4 unit properties: These can qualify if held for investment or business. If you live in one unit, only the rented or investment portion is eligible. Careful allocation by square footage, rental days, and records is important.
- 5+ unit buildings: These are usually straightforward investment properties. They tend to present less audit risk because there is no personal use.
The qualified intermediary’s role
A qualified intermediary, or QI, is a neutral third party who holds your sale proceeds and uses them to acquire your replacement property. You cannot take or control the funds at any point. The QI prepares exchange documents, receives your written identification, and wires funds to closing. Choose a QI with strong references, clear fees, and appropriate insurance.
Common documents include an exchange agreement, assignment of contracts, identification notice, and closing statements. Keep everything organized to support your reporting.
Taxes to watch: boot, debt, depreciation
Any cash you receive that is not reinvested is called cash boot and is taxable up to your gain. Debt matters too. If you pay off a larger mortgage on the sale and take on a smaller mortgage on the purchase, the reduction can be treated as mortgage boot unless you add new debt or cash to fill the gap. Depreciation recapture is deferred in a proper 1031, not erased. It follows into your replacement asset and can be recognized in a later taxable sale.
Simple example: You sell with a 1,000,000 dollar mortgage and buy with a 700,000 dollar mortgage. Unless you bring 300,000 dollars of new cash or debt, you may have 300,000 dollars of debt relief treated as boot.
State and local costs in New Jersey
Federal tax deferral does not cancel state or local transfer costs. New Jersey’s Realty Transfer Fee and local recording fees still apply to most conveyances. Build these costs into your budget and timeline.
- Review state guidance: New Jersey Division of Taxation — Realty Transfer Fee
Replacement strategies that work here
- Direct purchase: Swap a Jersey City 3‑family for a larger Hudson County building or another U.S. property that fits your goals.
- Reverse exchange: When you must secure the replacement before selling, a specialized structure can “park” the property. This is more complex and costlier, but it preserves the exchange.
- DSTs and TICs: Delaware Statutory Trusts and Tenants‑in‑Common interests can qualify and give you passive exposure to institutional assets. You gain simplicity but give up control. Review offering materials with counsel and confirm fit with your plan.
Financing and closing logistics
Lenders underwrite 2–4 unit buildings differently than 5+ unit assets. Terms and timing affect your ability to replace debt and avoid mortgage boot. Rate locks, appraisal ordering, and legal review should align with the 180‑day window. Work with a lender familiar with 1031 timelines to keep closings in sequence.
Jersey City due diligence checklist
Strong rental demand and proximity to New York City support values, but local details drive returns. Before you commit, confirm:
- Certificate of occupancy, rent rolls, and tenant estoppels.
- Municipal code compliance, open permits, and any housing violations.
- Lead paint and safety issues in pre‑1978 buildings, plus relevant inspections.
- Environmental concerns if known or suspected.
- Municipal registration, rent regulations, and tenant protection rules that may affect income.
A step-by-step plan
Pre‑sale preparation
- Engage a 1031 attorney or CPA and select a reputable QI early.
- Confirm investment use and collect leases, rent rolls, and operating records.
- Model debt replacement with lenders so you avoid accidental boot.
- Decide your strategy: direct purchase, reverse exchange, or DST/TIC.
During the exchange
- Sign the exchange agreement and assign the sale contract to your QI before closing.
- Identify replacement property in writing to the QI by day 45 using the three‑property, 200 percent, or 95 percent rule.
- Keep funds with the QI to avoid constructive receipt.
- Track debt and cash flows to maintain full deferral.
After closing
- Maintain documentation that supports investment use of the replacement.
- File your federal return with the required 1031 report.
Simple scenarios
- Scale up: You sell a Jersey City duplex and buy a 10‑unit building in Hoboken. You meet the 45 and 180 day deadlines, match or increase your total debt, and reinvest all proceeds. You defer both capital gains and depreciation recapture.
- Go passive: You sell a 4‑family and place the proceeds into a DST that holds a stabilized apartment community. You defer taxes and shift to hands‑off income, but you accept limited control and sponsor‑driven timelines.
Reporting and recordkeeping
You report your exchange on IRS Form 8824 for the tax year your exchange closes. Keep all QI statements, identification notices, closing documents, and operating records. Good records support your investment intent and help if your file is reviewed.
Avoid these pitfalls
- Missing the 45‑day identification or 180‑day closing deadline.
- Touching the sale proceeds or directing funds outside the QI.
- Underestimating mortgage boot when replacing debt.
- Overlooking related‑party rules and required holding periods.
- Ignoring New Jersey transfer fees and local compliance costs.
Ready to explore your options
If a 1031 exchange could help you reposition, scale, or simplify your Hudson County portfolio, line up the right team and plan early. With disciplined timing, solid due diligence, and a clear financing plan, you can protect your gains and move into assets that fit your strategy.
For a private, strategy-first conversation about your next move, connect with Carlos Beltran. We bring attorney-grade diligence, investor fluency, and high-touch execution to exchanges across New Jersey and New York.
FAQs
Can I exchange a duplex if I live in one unit?
- Only the investment portion qualifies. The rented unit and any part held for investment may be exchanged. Allocate carefully and keep records of use and income.
What if I miss the 45-day identification deadline?
- Missing day 45 usually disqualifies the exchange and triggers tax on the sale. The IRS and courts are strict, so set reminders and have backups identified early.
Can I buy in New York after selling in Jersey City?
- Yes. U.S. investment real estate is like-kind to other U.S. real estate, so you can replace in New York or any other state if all 1031 rules are met.
Do 1031 exchanges avoid New Jersey transfer fees?
- No. State and local transfer fees, recording charges, and municipal costs still apply in New Jersey regardless of federal deferral.
What forms do I file for a 1031 exchange?
- File IRS Form 8824 with your federal return for the year your exchange closes and keep all QI and closing documentation for your records.
