Thinking about selling a Cohasset rental or second home and reinvesting the proceeds without taking a big tax hit? You are not alone. Many Boston and South Shore investors use a 1031 exchange to defer federal taxes and move into a property that fits their next chapter. In this guide, you will learn the basics, the strict deadlines, and the coastal factors that matter in Cohasset so you can plan with confidence. Let’s dive in.
What a 1031 exchange does
A 1031 exchange lets you defer federal taxes on the gain from selling qualifying real property when you reinvest into other like-kind real property. The deferral covers both capital gain and depreciation recapture. You may owe taxes later if you sell the new property without doing another exchange.
Since 2018, only real property qualifies. Personal property does not qualify. U.S. real property also cannot be exchanged for foreign real property for deferral. You must report your exchange on your federal return using Form 8824 and keep complete records of the transaction.
Who it works for in Cohasset
Many Cohasset investors own coastal single-family rentals, condominiums, seasonal cottages, multi-family buildings, or small commercial spaces. If you hold the property for business or investment, it may be eligible.
A second home can sometimes qualify after a genuine conversion to investment use. Clear evidence helps, like rental marketing, leases, separate bookkeeping, and time as a rental. The IRS looks at facts and intent, so plan early and document everything.
If you rely on short-term rental income, confirm local rules before you convert. Many Massachusetts towns require permits or have restrictions that can affect your operating plan and your ability to show investment intent.
Deadlines you cannot miss
Two federal timelines define a 1031 exchange. Both are strict and measured in calendar days.
- Identification period: You have 45 days from the date you transfer the relinquished property to identify replacement properties in writing. The identification must be clear and specific.
- Exchange period: You have 180 days from the transfer date to close on the replacement property. If your tax return is due earlier, that earlier due date controls unless you file an extension.
Extensions are rare. Missing either deadline will cause the exchange to fail.
Like-kind and value rules
For real estate, like-kind is broad. You can exchange a single-family rental for a multi-family, a condo for a retail building, or land for an apartment, as long as both are held for investment or business use.
To fully defer gain, you need to reinvest all cash proceeds and replace equal or greater value and debt. Any cash or non-like-kind property you receive is taxable as boot, up to your gain.
Quick examples
- Example 1: You sell a Cohasset rental for 1,000,000 dollars with a 300,000 dollar mortgage and buy a replacement for the same price and debt. You reinvest all proceeds and match the debt. Result: gain is deferred.
- Example 2: You sell for 1,000,000 dollars but buy for 900,000 dollars and reduce debt. The 100,000 dollar shortfall may be taxable boot.
- Example 3: You convert a seasonal home to a bona fide rental with leases and records, then exchange into another rental. This can work, but it is higher risk. Keep strong documentation and get specific tax advice.
Your step-by-step exchange plan
- Plan before you list: Clarify your goals, target markets, and timing. Speak with a CPA and a 1031 attorney early.
- Engage a Qualified Intermediary in writing before you close the sale. The QI must hold the proceeds.
- Close the sale of the relinquished property. Proceeds go directly to the QI to avoid constructive receipt.
- Within 45 days, identify replacement property in writing using accepted IRS identification rules.
- Close on the replacement property within 180 days, with funds flowing from the QI under the exchange agreement.
- File Form 8824 with your federal return and keep all exchange documents.
Picking a Qualified Intermediary and team
A Qualified Intermediary is central to the process. The QI prepares exchange documents, holds your funds, and coordinates the disbursement at closing. Line up your QI before your sale closes.
You will also want a CPA and an attorney with 1031 experience. For Cohasset and Boston transactions, use a title company that understands exchange mechanics and local recording practices. In Norfolk County, deeds and mortgages are recorded at the Registry of Deeds, and clean title is essential to stay on schedule. Work with lenders who know how to underwrite within the tight 1031 window.
Coastal and Boston-area practicalities
Cohasset’s shoreline setting is an advantage, but it comes with extra steps that can impact an exchange timeline.
- Flood zones and insurance: Many coastal properties fall within FEMA flood zones. Lenders often require flood insurance, which can affect loan terms and closing speed. Factor this into your 180-day window.
- Environmental and coastal permits: Shoreline, wetlands, and Chapter 91 considerations may apply, especially if you plan improvements. Permitting can take time and may limit construction during an improvement exchange.
- Historic or conservation restrictions: Easements and community preservation restrictions can affect value and feasibility. Order title review early so you can identify and resolve issues.
- Short-term rentals: If you plan to operate as a short-term rental to document investment use, confirm Cohasset rules and any required permits before you rely on that income in your plan.
Financing and mortgage considerations
Debt matters in a 1031 exchange. If your new loan amount is lower than the debt you paid off on the property you sold, the reduction may be treated as boot. You can offset the reduction by adding cash to the purchase.
Because lenders have their own underwriting steps, lock in a lending path early. A pre-approval does not replace an appraisal or flood insurance review. Make sure your lender can target the closing date within your 180-day deadline.
Advanced exchange options
- Reverse exchange: You buy the replacement before you sell the relinquished property. An Exchange Accommodation Titleholder may hold title while you complete the sale. The total timeline still cannot exceed 180 days. This route is more complex and costlier.
- Improvement exchange: You can direct exchange funds to improve the replacement property through a qualified structure. Permits and contractor schedules must align with the exchange timeline, which can be challenging for coastal projects.
If you think you need one of these structures, engage your CPA, attorney, QI, and lender as early as possible.
Common pitfalls to avoid
- Missing the 45-day identification or 180-day closing deadline.
- Having constructive receipt of sale proceeds instead of routing funds through the QI.
- Failing to replace value and debt, which creates taxable boot.
- Trying to replace with foreign property. U.S. property cannot be exchanged for non-U.S. property for deferral.
- Weak documentation when converting a second home to a rental. Keep leases, ads, and records.
- Related-party transfers without proper planning. Special holding rules can force recognition.
What to confirm with your CPA
- Will Massachusetts follow federal 1031 deferral in your situation, and what state filings are required?
- How will depreciation recapture be treated now and on a future sale?
- Do related-party rules affect your plan or holding period?
- What structure is best if you need a reverse or improvement exchange?
- What documentation will support intent if you convert a second home to a rental before exchanging?
Timeline and document checklist
- Signed QI agreement and exchange instructions.
- Purchase and sale agreements for both properties.
- Settlement statements and proof that funds flowed through the QI.
- Written identification notice for replacement properties.
- Title commitments, surveys, and insurance, including flood insurance if required.
- Lease records and property management evidence if converting from personal use to rental use.
Get local help that fits your strategy
Your exchange plan should match your investment goals, property type, and timeline. In a coastal market like Cohasset, smart preparation is everything. If you are selling the relinquished property, presentation can help you maximize sale proceeds that you can roll into your next purchase. Thoughtful staging, strong marketing, and clean documentation make a real difference when the clock is ticking.
If you want a hands-on partner across Greater Boston and the South Shore, we are here to help you map the steps, coordinate with your QI, and line up contractors, lenders, and title. Ready to get started or need a second opinion? Connect with Victoria Pacella for a tailored plan for your 1031 and a no-pressure valuation of your current property.
FAQs
How does a 1031 exchange work for a Cohasset rental I own?
- You sell the rental, have a Qualified Intermediary hold the proceeds, identify replacement properties within 45 days, and close on the new property within 180 days to defer federal taxes.
What are the 45-day and 180-day deadlines in a 1031 exchange?
- You have 45 calendar days after your sale to identify replacement properties in writing and 180 calendar days to complete your purchase, with no typical extensions.
Can I use a 1031 exchange for my primary home in Boston or Cohasset?
- No, property held for personal use does not qualify. Only real property held for investment or business use is eligible.
Does Massachusetts follow federal 1031 rules for state taxes?
- Massachusetts often conforms to federal treatment, but details and filings can vary, so confirm your situation with a CPA familiar with state rules.
How do flood zones in Cohasset affect my 1031 exchange?
- Flood zones can impact insurance, lending, and appraisal timing, which can compress your 180-day window, so plan for these steps early.
Do I need a Qualified Intermediary in Massachusetts for a 1031 exchange?
- Yes, a QI is required to hold proceeds and document the exchange. Engage the QI before your sale closes to avoid constructive receipt of funds.
Can I buy a vacation property outside the United States with my exchange funds?
- No, U.S. real property cannot be exchanged for foreign real property for 1031 deferral.
