1031 Exchange Pension

8 Replies

Hey all,

Very interested in 1031 exchanges.  Does anyone know if they can apply to a pension account?  I'm leaving my position and don't want to just pull out my pension so they can tax me like crazy, and I'd love to use it on a property.


A 1031 has to move from real estate investment to another real estate investment. you can however move your 401k into a self directed IRA.

Unless your pension account is already invested in an asset that the IRS considers "1031-exchangeable," you cannot do a 1031 exchange at this point (https://www.irs.gov/uac/like-kind-exchanges-under-irc-code-section-1031.) What you can do is a rollover (https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions) from your employer's retirement account into another retirement account, including a self-directed one. Only from a self-directed account can you then invest in a real property as an investment.

Then, once there is appreciation in that property, you can sell it and invest the proceeds into a like-kind investment - but, there is no need to do that as part of a 1031 exchange because your retirement account is already a tax-deferred account.

The whole purpose of 1031 is to defer paying taxes either until you no longer want to be an investor and sell the asset, or until your descendants (who would inherit your investment real estate at whatever value it may be on the date of your death - best case scenario, if you love your descendants, that is) decide to cash out. A Roth account is somewhat similar when it comes to these tax benefits.

About the only time a 1031 exchange within a tax-deferred account makes sense is if you borrowed money to purchase the asset in the first place (too complicated for me to understand for myself and explain here - but that's the only benefit of a double-tax-deferred transaction that I recall ever hearing about.)

Btw, I am presuming that your "pension" is not a "defined-benefit" account, like, say, in many government agencies. If it is, and you have no reason to fear for its long-term safety (which I understand is a big question in Illinois,) I wouldn't cash out - a guaranteed monthly check sometime in the future is better than a gamble, even on real estate. Instead, find other cash to invest with.

Defined-benefit accounts are a dying breed - majority of the risk is on the employer/taxpayer (depending on who the employer is.)

However, if your "pension" account is "defined-contribution" - majority of 401/403/457s are - it's a fair game to roll it over into a self-directed account to invest in real estate.

not a 401/403/457, I believe it IS defined benefit as I work for city government as a firefighter.  Definitely doing a lot of research before I cash it out/if I cash it out

We have experienced government workers giving concessions to their employers in California. In some cases, there was no choice, as cities actually went through bankruptcies. In no case, as far as I know, did any employee lose everything. I know some guys who decided to retire before their benefits-eligibility date (like age 50) just so that they could "freeze" the original benefit before the new rules kicked in. The left their pensions untouched - each was vested. These guys then got jobs in the private sector or another city/county with a different retirement system - they could see what was coming before it hit.

I think that some of those massive concessions have recently been overturned by courts - California is doing somewhat better financially, too. I hear that, besides Puerto Rico, Illinois has the largest pension underfunding in the US.

So, an argument can be made that your money (money that you have put into the system and can therefore take out before your retirement date - and forfeit the retirement benefit) should be taken out and invested elsewhere, anywhere safer than the State of Illinois. But, even in the worst case of concessions imaginable, would you really do better on your own in real estate than if you let it ride in the defined-benefit system that will pay you until the day you die, and may even pay your surviving spouse beyond that - figure out your likely longevity.

Talk to your union leaders about what the worst case of concessions may be before you make up your mind on pulling out the money. We all need firefighters. City leaders - and taxpayers - get it. I don't think your job can be automated that soon.

Not looking to pull it out because I think I can do better or scared of collapse, leaving my position for a new field.  There is not enough money where it makes sense to leave in there until I'm of retirement age, so it seemed overall more beneficial to take it out.