I don't really want to 1031. Am I wrong?

8 Replies

I'm selling a property and I'll only owe approximately $4k in taxes on it. 

I spoke to a QI who quoted me around $1500 to do a 1031.

I generally try to *legally* avoid giving the government tax money, whenever I can avoid it. 

But I'm actually not crazy about buying anything right now or pressuring myself to pick up a so-so deal. Our market is very hot and margins are thin here. I could try and find something off market, but I'm not full time in RE yet, so it's 50/50 I'd even find one in time. I still have a full time W2 job, and I'm not sure I want to box myself in. 

Even though paying taxes unnecessarily is almost sacrilege in real estate, is it bad if I just eat the tax? I'd still be in the green. This was my first property and really just a learning experience. 


Absolutely not. As the saying goes, don't let the tax tail wag the investment dog. 1031's come with a number of drawbacks, one of the biggest being the timeline requirements. Currently in almost every market, Real Estate prices are at record highs. If you 1031 now, you may be forced to over pay for a property. The money you could save by waiting for the right opportunity could far out way the taxes you pay. 

Another thing to consider, a 1031 exchange defers taxes, it does not erase them. All you are doing is kicking the can down the road. If you sell later, eventually you may have to pay back those taxes. No harm in paying that bill later, and freeing up more depreciation down the road. 

@Ross Bowman You're certainly not wrong. If you want to keep things simple and pay the taxes, that's certainly your call. Since you mentioned this was your first property, I'll highlight talking to your CPA to make sure you have your numbers right when making your final decision. Depending on how long you held that property, depreciation recapture may or may not be significant, in addition to paying capital gains. You may also want to look into reverse exchanges, depending on when and why you are selling.

You've got options. Best of luck.

@Salvatore Lentini , Love that - "just a tool, not a rule"... I'm gonna borrow it!!! @Ross Bowman , The whole power of the 1031 is the compounding effect of using deferred tax dollars to purchase more real estate producing more gain and tax letting you use the tax to buy more..... You get it.  

For you the numbers aren't so great.  BTW - $1500 for an exchange like you're envisioning is way high above norm.  The national average is around $850.  But that aside you're still only talking about $3K of savings.  And while I'm never a fan of taxes, this is a small enough amount that you're not going to really hurt. yourself letting this one go - especially if you don't want to buy back in now.

If the tax was as much as a big chunk of a down payment my answer would be very different.

Or as I've been known to say - no one ever went broke paying tax on profit.  It just feels like it!

This just came up on a recent podcast episode I listened to. It was somewhere in the 360's. The guest was also not into 1031's and was ok with just paying the taxes. You aren't alone. 

With only $4k in taxes I assume you bought it in the last few years (so the 25% depreciation recapture taxes are almost zero) and you’re making less than $25k in profit.  (Since that would be $3,750 plus depreciation.)

That’s definitely not a “I have to 1031 his property” situation. I have a couple properties I bought about 8 years ago where I’m looking at $30-$40k in taxes, these are not really expensive properties. And I’m only considering doing a 1031. 

Originally posted by @Dave Foster :

@Salvatore Lentini , Love that - "just a tool, not a rule"... I'm gonna borrow it!!! @Ross Bowman, The whole power of the 1031 is the compounding effect of using deferred tax dollars to purchase more real estate producing more gain and tax letting you use the tax to buy more..... You get it.  

For you the numbers aren't so great.  BTW - $1500 for an exchange like you're envisioning is way high above norm.  The national average is around $850.  But that aside you're still only talking about $3K of savings.  And while I'm never a fan of taxes, this is a small enough amount that you're not going to really hurt. yourself letting this one go - especially if you don't want to buy back in now.

If the tax was as much as a big chunk of a down payment my answer would be very different.

Or as I've been known to say - no one ever went broke paying tax on profit.  It just feels like it!

Really appreciate the insight Dave - thank you sir! Also, did not realize how expensive the fee I was looking at was. I guess I'll have to shop around different QIs for when I actually plan to do one with a bigger tax burden. 

You are a QI, right? I know this isn't the "self promotion" section of the forum but I assume its okay since I'm the one asking!