Would you do a 1031 in this market?

Question

Closing on the sale of a property in 3 weeks and trying to finalize whether or not I should do a 1031 or not.

I’ve discussed with my accountant and If I don’t, capital gains would be just under $30K.

I’m based in RI, and the multi family market is hot at the moment, which makes me feel like I’ll easily spend the $30K I’d “save” by deferring it with the 1031due to higher home prices vs waiting until 2021. I know we can’t predict the future, but any thoughts?

Dave Foster · Answer

@Todd L., Never buy a bad property on purpose - ever!  In the race it's not what you make that matters as much as it's what you keep.  And that is where the 1031 comes in and you get that I know.  Valid concern about not finding the right replacement.  But it's not completely an either or choice.

There is no penalty for starting and not completing a 1031 exchange.  If you can't find suitable replacements then do not turn in a 45 day identification list and your exchange will die on day 46.   You'll end up paying the tax but you took a swing at a replacement.  And all it cost you was a small exchange fee.  A lot of folks are thinking that inventory's going to loosen up in the next 60 days as the incentives and prop ups end and overleveraged land lords have to get more flexible.  But you never know.  Keeping options open is never a bad option.

Betty Klein · Answer

I sold my condo just after the March lockdown. Since I wanted a 1031 exchange I had a hard time finding a replacement property. As a back up strategy I had contacted 3 DST brokers. It turned out to be a good thing, because after July 15. the inventory dried up even more. Only 1 broker had feasable DSTs available, and the SF market had gone to multiple offers. Eventually I purchased commercial realestate DST of a store that stayed open through the pandemic and the second property is a mobile home park. Received my first payment this month.

John Colburn · Answer

That is a tough call.   The worst thing to do is overpay $100K on a property to save $30K in taxes.   Personally I think the market in MA and RI is overpriced and ripe for a correction.

Housing prices wont go down for a few years.   It will get to a point that there are no buyers, but for the first couple of year sellers will not be willing to lower prices.    In year three when nothing is moving people will start to walk away from properties when they realize the market value is much less than what they owe.   I have been through this cycle at least three times most notably in 2006.

I always tell my children the time to buy stock or houses is when no one wants them, and the time to sell is when everyone is buying.    Right now everyone we know is buying stock and real estate and making money.

The most important answer to your question if you do not have discipline to hold on to the cash you are much better off with a 1031.

David M Trapani · Answer

Unless you need "cash out" of the deal (taxable 'boot'), I'd say do the 1031. One of the last best ways to preserve & build wealth over the long haul.And, they may take away the 1031, so get while the getting is good ( :

Will Fraser · Answer

Hi @Todd L., one clarification I want to make:  your capitals gains are $30k or the tax you'll pay on your capital gains is $30k?

In either case I'd strongly consider exchanging, as I like the idea of "swap till you drop" and the multiplier effect it can have, especially generationally.  However, if I'd pay 15% on $30k of gains then I'm slightly less than 100% on the 1031.  I guess it really comes down to what you need right now:  if you need the cash keep it.  If not swap up and to the right :)

Paul Moore · Answer

Hi @Todd L..  I would agree with comments above that you don't want the tax dog to wag the asset tail and make a bad decision. But as @Dave Foster said, you can always start a 1031 and then bale out on it with no penalty.  In an ideal world, it would be great for you to swap 'till you drop with that basked of funds and set it aside from other assets and income you earn - in a separate "silo" like some do with their IRA or 401(k) funds.

If you get down to the wire, a DST (Delaware Statutory Trust) is an increasingly popular option as mentioned by @Betty Klein. Mobile home park DSTs are really rare, so I'd be really curious about where you found that, Betty. Some DSTs have no-loads and allow you to work directly with the sponsors now.

Todd L. · Answer

@Dave Foster Yes, we closed in early September in the property we sold, so I was referencing the 45 day identification window.

Basit Siddiqi · Answer

@Todd L.$30,000 of taxes is pretty significant. I would have done a 1031.The great thing about a 1031 is that everything is flexible. You can exchange 1 property for 2 properties, 2 properties for 1 property. A property in State A for a property is state B.

Todd L. · Answer

@Will Fraser the tax on the gains would be $30K. I’m leaning in that direction (swap til you drop) too, just curious what others think.

Thanks!

Brandon Bruckman · Answer

@Todd L. Have you considered looking outside your market? We are seeing good deals still in secondary markets.

Would you do a 1031 in this market?

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