You worked hard to build equity in your Southampton property. A 1031 exchange can keep more of that money invested instead of going to taxes. In the Hamptons, high prices, tight inventory, and changing rental rules make planning essential. This guide breaks down the basics, the Southampton twists, real use cases, and a simple checklist so you can move with confidence. Let’s dive in.
1031 basics in plain English
A 1031 exchange lets you defer capital gains tax when you sell investment or business real estate and buy other like-kind real estate to hold for investment or business use. Since 2017, 1031 applies to real property only. It defers tax, not eliminates it. IRS guidance clarifies the rules and definitions.
Two deadlines control your exchange. You must identify replacement property in 45 calendar days and close within 180 days. Most people use a Qualified Intermediary to hold proceeds and file IRS Form 8824 at tax time. See the IRS instructions for timing and reporting.
Watch for “boot.” Cash received or a reduction in mortgage debt can be taxable boot. Your basis carries into the new property, and depreciation taken before the exchange may be subject to future recapture. These details are covered in IRS guidance on 1031.
Why Southampton is different
Prices are high and inventory is limited. Recent regional reports show Hamptons median prices near or above $2 million in 2025, which can compress your 45-day search for suitable replacements. See the local market snapshot.
Short-term rental rules are changing. Inside the Village of Southampton, a recent amendment requires a minimum two-week rental or two one-week rentals per year, which affects investment income plans and how you document investment use. Always confirm whether a property is in the Town or the Village. Read the news on the Village’s new minimum rental period.
Transfer taxes apply at closing and are not deferred by a 1031. Budget for New York State transfer tax, the 1 percent mansion tax on residential purchases of $1 million or more, and the East End’s Community Preservation Fund (CPF) surcharge common in Southampton. Learn more about New York transfer and mansion taxes.
Southampton 1031 use cases
Trade up to a compound
You sell a long-term rental in Southampton and buy a larger rental compound. To fully defer tax, match or exceed the sale price and replace equal or greater debt to avoid boot. Start early so you can identify within 45 days and close within 180 days. If the perfect property appears before your sale, you may consider a reverse exchange.
Convert vacation home first
You own a Southampton vacation home and want to use a 1031. Convert it to a bona fide rental and follow the safe harbor in Revenue Procedure 2008-16, including documented market-rate rentals and limited personal use. The Village’s two-week minimum does not block seasonal or monthly rentals that meet safe-harbor thresholds. See the safe-harbor summary.
Consolidate with DST or TIC
If you sell several cottages and cannot find a single local replacement, you can exchange into a Delaware Statutory Trust (DST) or Tenancy-in-Common (TIC) interest, which the IRS recognizes as real property for 1031 purposes. Review IRS Revenue Ruling 2004-86 for DST treatment. Understand sponsor risk and limited liquidity, including the possibility of forced conversions; here is a plain-English view of DST conversion risks.
Buy first with reverse exchange
In a fast market, you might acquire the replacement property before selling your relinquished property. A Qualified Exchange Accommodation Arrangement parks the new asset temporarily. Reverse exchanges add cost and complexity, but they can preserve timing. Get an overview of a reverse exchange arrangement.
Exchange into other states
You can sell in Southampton and buy investment property anywhere in the U.S., as long as it is like-kind real property held for investment or business use. Factor in state and local taxes and cash flow when comparing options under IRS 1031 rules.
Pitfalls to avoid
- Treating a personal-use home as an investment without documentation. If you plan to rely on rental activity, follow the Revenue Procedure 2008-16 safe harbor and keep leases, ads, and receipts.
- Assuming a 1031 defers everything. New York transfer and mansion taxes and the Peconic Region CPF surcharge are paid at closing. They are not deferred.
- Missing debt replacement. If your new loan is smaller than the old one, or you take cash out, that difference can be taxable boot.
- Waiting to pick your Qualified Intermediary. Vet your QI early, understand their controls and bonding, and follow written identification rules. Review the core steps and QI role.
- Overlooking DST sponsor risks. DSTs can limit control and liquidity. Read sponsor documents carefully and seek independent advice.
- Underestimating timing risk. With 45 days to identify, tight inventory can derail an exchange. Line up backups or consider reverse exchanges or fractional options.
Southampton 1031 checklist
Confirm investment use. Gather leases, rental receipts, ads, and management agreements. If converting a vacation home, plan rentals and limit personal use per the safe harbor.
Meet your tax advisor and select a Qualified Intermediary before listing. Do not touch the sale proceeds.
Verify your jurisdiction and rental rules. Know whether the property is in the Town or the Village of Southampton and what permits apply.
Choose your replacement strategy now. Trade up locally, go out of market, consider DST/TIC, or plan a reverse exchange if you must buy first.
Model closing costs. Include New York transfer and mansion taxes and the Peconic Region CPF surcharge in net proceeds and financing plans.
Execute on time. Use the three-property or 200 percent identification rules in writing, and close within 180 days. Keep all closing and QI documents for IRS Form 8824.
Plan the future. If you may convert the new property to personal use later, map holding periods and understand depreciation recapture and any limits on primary residence exclusions.
Let’s talk strategy
Your exchange is about more than taxes. It is about picking the right property, timing the move, and staying compliant with local rules. If you want a clear plan for Southampton or the broader Hamptons, connect with Bill Williams to align your exchange timeline with the market and find the right replacement options.
FAQs
What is a 1031 exchange for Southampton investors?
- It is a federal tax deferral that lets you sell investment real estate in Southampton and buy other like-kind real estate for investment or business use while deferring capital gains tax.
How do the 45 and 180 day deadlines work in a 1031?
- You have 45 days to identify replacement property in writing and 180 days to close, using a Qualified Intermediary to hold funds and report on IRS Form 8824.
Do New York transfer taxes or the Peconic CPF get deferred by a 1031?
- No. State transfer tax, the 1 percent mansion tax on purchases of $1 million or more, and the Peconic Region CPF surcharge are paid at closing and are not deferred.
Can I use a 1031 with a Southampton vacation home?
- Yes, if you first convert it to a rental and follow the Revenue Procedure 2008-16 safe harbor with documented rentals and limited personal use, then exchange into another investment property.
How do Village of Southampton rental rules affect a 1031 plan?
- The Village’s two-week minimum rental period can limit short stays, so you should plan for seasonal or monthly rentals and document investment use accordingly.
When is a reverse exchange useful in the Hamptons?
- When the ideal replacement property appears before your sale, a reverse exchange can help you buy first and sell later, though it adds cost and complexity.
