Is now the time to 1031?

Question

Hi All,

Not sure if it’s better to 1031 during a red hot economy like it is now or if it’s better to wait til things cool off.

I understand I’ll get paid more for what I sell and sell it quicker, but I have a higher likelihood of overpaying on purchase and/or buying something I shouldn’t.

My thought process is that as the 1031 clock starts when you sell it might be better to wait until things cool off so I’m more likely to find a decent deal. (Of course NO idea when that would be!). My property equity might go down at that time, but so should my future properties price (if in the same market).

Please poke any and all holes in my logic you can see. I’ve posted this to invite diverse opinions.

Dave Foster · Answer

@Brent Crosby, When doing a 1031 it's your skill at locating good investment opps that's the key.  Selling in an up market means your skill is key to finding the right replacement.  You have to work harder.  But that's probably what you're good at.  meanwhile you're getting a premium.  If you're selling in a down market sure you can find good replacements everywhere but you're losing the premium on your sale.

Where the 1031 can benefit is when you're changing sectors from a topped out market to a surging market.  Or maybe like your situation where you're selling at the top and buying potentially at the top but moving to better cash flow regardless.  Don't let the market scare you.  You can make it work.

A reverse exchange can mitigate some of that.  In a reverse you get to lock up and control your replacement property before you sell your old property.  So you ease the angst of finding your replacement.  And for a time you get to double dip the income from both your old and new property.  Reverses are more expensive but if the profit justifies it then they can be a huge tool for you.

Jake S. · Answer

Hey @Brent Crosby Do you like the current property? Does it cash flow well? If so, maybe just refinance?

I don't like playing the what if/waiting game, so if the numbers make sense to you, id just do it. Otherwise, who knows how long youll be waiting

Mike Dymski · Answer

An appreciation strategy requires either (1) holding long-term and riding the market cycles or (2) exiting when the market is hot.  Option 3, exiting when the market is cold is a losing proposition.

Some investors who follow option 2 reinvest sales proceeds from value plays into cash flow plays and/or they reinvest in different markets.

Chris Brown · Answer

Crystal Balls are hard to find :).

If the property you currently own is performing well, then why sell?  However, if you are thinking of adding to your portfolio, this could be a good time to liquidate and move on to other opportunities.  What does the replacement property market look like?  Can you find a diamond in the rough or two, secure a contract and leverage existing income / equity into more?  Could you get the new property under a contingent contract based on the sale of the property you now own?

You may also be able to complete a reverse exchange where you buy the replacement property (ies) first, then sell the one you own.  Provided this can happen within 180 days, the exchange will work.

Sam Shueh · Answer

They are predicting a recession about 3-5 quarters away.  Home prices will be soft in 2020 and on. Do not expect a housing melt down like last time. Just a recession.

The corp tax reduction to bring business back and company use the money to buy back stocks inflate the Wall Street.  The Trade War will wipe out some of the growth. Recession will return.

Brandon Bruckman · Answer

If your local market is hot, selling and diversifying across geography and asset type could make sense.  Passive investments like DSTs could be a place to park the proceeds from a sale, defer tax and wait for your next move.

Jake S. · Answer

@Brent Crosby If your cash flow could triple, I would do a 1031 hands down. Otherwise, Im sure a refinance and redeploying that capital would do the trick as well!

Brent Crosby · Answer

Thanks for the info! Much more expensive, but I could see how that much could be very worth it if it helps you find the right deal.

Dave Foster · Answer

@Brent Crosby, While a regular exchange will run you $750 - $1000 a reverse will add an additional $3000 - $6000.  So yeah, they're quite a bit more expensive.  The reason is that the QI has to take title.  And you have to be in control.  And there is a safe harbor from the IRS that has to be followed.  So there's titles, NNN leases, mortgages, options to purchase, and 1031 docs galore!

Brent Crosby · Answer

Great insight, thank you Dave. The points made here lead me to believe that now is the time. I had no idea a reverse was more expensive to do. Is it significantly more expensive? Say, twice as expensive or something like that?

Is now the time to 1031?

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