Considering First 1031 - Any Advice?

Question

Hi,

I have a rental that is now paid off. I want to do a 1031 exchange. I'll take any advice anyone has... pros, cons, pitfalls, gotchas, financing options. Note I've done a bunch of reading I know the basics (have to buy in a certain amount of time, like exchange, etc.). I'm looking for real world experience - anything I might not be obvious.

Thanks in advance!

G. Brian Davis · Answer

Hi @Mike Smith nice to meet you here on BP! So here's some basic but important advice. Make sure to line up a qualified intermediary and replacement options before you sell, because the timelines move fast and deals fall through. Be conservative on values and debt replacement, since missing either can trigger unexpected taxes. Financing can be trickier than expected, especially if you’re moving into a larger or different asset type, so talk to lenders early. Also think carefully about your long-term hold and exit strategy, because once you exchange, you’re usually committing to staying invested for a while to fully realize the tax benefits.

Arman Ahmed · Answer

@Mike Smith

Congrats on being in that position, Mike. The biggest real-world issue with a 1031 is how fast the timeline moves—45 days goes by quickly, so having solid replacement options lined up before you sell is critical. I’ve also seen deals fall apart due to inspection surprises or lender delays, so getting everyone aligned early makes a huge difference. The smoother exchanges usually come down to preparation, not luck.

Marc Rice · Answer

Hey Mike, what markets are you planning to look at? Only Dayton? I suggest looking at some of the other markets in Oh, or the midwest for a better outcome. Happy to help!

Stacy Raskin · Answer

Doing your research and knowing the market regarding pricing and comps before you begin the process can be helpful. Identifying the property early on is very important since in my experience many investors will not really know what they want to buy and then they get stressed because they are on the clock. It can be helpful to work with a mortgage broker familiar with the 1031 exchange process and get prequalified so the financing piece doesn't hold you up. Happy to connect to discuss further.

Nicholas Dutson · Answer

Totally get it, @Mike Smith. Since you’ve got a paid off rental, you’re in a strong spot, but it also means the exchange has a couple extra places people get surprised (mostly around cash, debt replacement, and timing). Here’s the short, real world version:

Biggest gotchas

• Start early. The 45 day clock goes fast. Have 2 to 4 replacement options lined up before you close.
• Use a QI before closing. If the sale proceeds touch your account, the exchange is usually dead.
• To fully defer tax: buy equal or greater value, reinvest all net proceeds, and be careful about “boot.”
• Paid off rental surprise: you may need to add debt or cash on the replacement to avoid taxable boot.
• Financing can be the bottleneck. Get prequalified with a lender who can close fast.
• ID smart. Use the 3 property rule and only identify deals you would actually buy.
• Keep title and intent clean. Same taxpayer on both sides, and the replacement should be held for investment.

Best practical tipDo not let the exchange force you into a bad deal. The tax savings are not worth buying junk under a deadline.

If you share your rough sale price and whether you want more cash flow vs less landlord work, I can suggest 2 to 3 replacement paths that fit.

Dave Foster · Answer

@Mike Smith, The IRS has to let you do 1031 exchanges.  But they do not have to make it that easy!  And they have applied specific requirements of the 1031 to successfully complete an exchange, that can be intimidating if it's your first one. Once you master how to navigate the requirements of the 1031, you can primarily focus on the beneficial compound effect it can add to your RE investing career.

Fortunately, the most important requirement is that you must work with a QI (qualified intermediary) in order to do an exchange.  They will be able to guide you throughout the process and provide all the proper documentation you need for when you file your taxes.

The hardest 1031 you'll ever do is your first one!

James Hamling · Answer

@Mike Smith My best tip and insight "from the trenches" Follows-up on @Stuart Udis

I find 1031's have best worked, when our acquisition is new built inventory, aka build-4-rent.

Were not scrambling to "find" a buy, we already had it long identified and in many cases, lined up. Because we targeted the specific structure type, in a specific development, in a specific market, for math/fact based reasons for all those.

Including the builder, we don't just stumble upon one, we choose a specific one that's best to work with, for our specific investment thesis.

Flip side of that coin, it's an all too common story of getting into something less then ideal because it's what closest was secured. Hitting the wall close to the dart board, get's no points.

My opinion is only sell for 1031 if already have a viable exit path. Hope is NOT a viable exit strategy.

Kerlous Tadres · Answer

@Mike Smith, the biggest 1031 gotcha is getting rushed and overpaying because you can’t find the right replacement in time, so I’d recommend lining up a few solid backup properties and your lender and 1031 intermediary before you sell. Also keep extra cash outside the exchange for repairs, reserves, and closing surprises so you don’t get forced into a bad deal.

Stuart Udis · Answer

A lot of investors end up buying bad real estate because they’re hyper focused on deferring taxes. In many cases, paying long-term capital gains tax is the better outcome than rolling those taxes into a weak deal. The real estate should stand on its own as a good investment, independent of any tax deferral.

John Morgan · Answer

@Mike Smith

I’ve only done one and it worked out great. My property was paid off too. Sold it for 100k and bought a SFR for 225k. After a couple years, I did a cash out refi on the house to pull out 133k tax free. I wanted to take advantage of some of that equity I had just sitting there doing nothing for me. I took that cash and bought 3 more rentals with 20% down on each one. So my cash flow from my first paid off property went from only $600/month to $3300/month due to my 1031 exchange into a better property, plus 3 more rental I got (for free) with the cash from the cash out refi. So yes, I’m a fan of doing 1031s. It was simple and seamless where the mediary did all the work at the closings.

Considering First 1031 - Any Advice?

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