Should I 1031 exchange?

Question

Hi,

I have a SFH that I will ideally sell for $100K. I purchased this property for $55k all cash and putting in another $20K in renovations to get it ready to sell. I want to upgrade to a multi family or use some of it to purchase land. Am I understanding that I would need to pay taxes on the  $25K profit, and if yes, is that worth deferring with a 1031 exchange or just pay the taxes now and have less of a time constraint? TIA

Dave Foster · Answer

@Yael Fuerst, if you choose not to do a 1031 exchange, you would also have to recapture all of the property's depreciation as well as capital gains tax when you sell. 10 years of depreciation on a $100K house ($80K of structure + $20K of improvements) You'll have an additional $9-$10K of tax on the depreciation.  All told you're looking at $15K ish for a tax bill.

It's been a couple of years since we did an exhaustive study for BP - https://www.biggerpockets.com/blog/1031-exchange-cost. ... prices have gone up.  But I know that you can still get a good exchange at this level for less than  $1k.  And not have to go with one of the free firms, who invest your exchange proceeds in lieu of collecting exchange fees.

Bottom line - Is spending $1K to save $15K worth it to you??  Some would say absolutely.  Some would say no.  I wouldn't let the time requirements of a 1031 exchange dominate your thinking at this stage in the market.  There's a good balance of inventory.  And if you're being proactive and shopping before you close the sale of your old property you can actually extend that 45- day window to 90 days.  And unless you're shopping for a unicorn property, 60-90 days (even 45) is usually plenty of shopping time.  Even at the height of the seller's market in this cycle, 92% of our clients were still completing their 1031's satisfactory replacement properties.

A 1031 exchange is pretty seamless for you.  But it is a couple of phone calls, some focused shopping, and some signatures.  You've got to weigh that against the $15K tax bill.

By the way - using your 1031 you could actually do both.  Purchase a small multi-family and use the deferred tax and a few more dollars to buy a small tract of land.  That is the power of the 1031 - Your deferred tax works for you - not the government.

Daniel Osman · Answer

@Dave Foster really great points as always. Do your clients proceeds go into an interest bearing account with a bank?  If not, where do they go?

Ashish Acharya · Answer

@Yael Fuerst Yes, if you sell for $100K, your taxable gain would be roughly $25K ($100K sale price - $55K purchase price - $20K renovations). However, you should also factor in closing costs, depreciation recapture, and any selling expenses, which could adjust your actual taxable gain.A 1031 exchange allows you to defer capital gains tax by reinvesting the full proceeds into another investment property, but it comes with strict timelines (you must identify a replacement property within 45 days and close within 180 days). If your goal is to scale into multi-family, a 1031 exchange could be a great way to preserve capital and avoid taxes. However, if you want more flexibility (like buying land, which may not qualify for 1031), it may be easier to pay taxes now and reinvest on your own timeline.Ultimately, it depends on your long-term strategy—if you're actively building a portfolio, deferring taxes and leveraging the full amount can be more beneficial. A real estate CPA can help run the numbers to see if a 1031 makes the most sense for your situation.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Emran Chowdhury · Answer

@Yael Fuerst

Yes, you will need to pay tax on capital gains ($25K) which might be 0,15,20% based on your tax bracket. As Daniel mentioned if you find no fee 1031 exchange, it might be worth to try. But please verify the QI status & reviews before even considering 1031 with the company.

Daniel Osman · Answer

@Yael Fuerst Based on the information you've provided, you have a potential gain of $25,000 from the sale. However, you mentioned owning the property for 10 years. If you have claimed depreciation on your single-family home over the years, the IRS requires you to "recapture" that depreciation when you sell the property. This means that the portion of the gain attributable to depreciation is taxed at a higher rate, up to 25%, rather than the lower capital gains rate.If you proceed with a 1031 exchange, you can defer both the capital gains tax and the depreciation recapture tax by reinvesting in a like-kind property. This allows you to leverage the full proceeds into a new investment property without immediate tax consequences.

As @Emran Chowdhury mentioned there is typically a cost to exchange, the average tends to be around $1,200. However, there are innovative companies offering a No Fee exchange. That makes it risk free for you to try and do an exchange, so even if you don't find anything within the 45 days there is still no cost to you. If you have the option to defer taxes and reinvest your full proceeds it's usually going to help you.

Yael Fuerst · Answer

Almost 10 years

Emran Chowdhury · Answer

Anything less than $100K Capital gains does not worth doing 1031. Minimum fee would be to do 1031 would be close to $1400, then you will need to juggle with multiple calendar deadlines. I did two 1031s in 2021 & 2024 - both were above $250K Capital gains.

First question is how long have you been owning the property?

Should I 1031 exchange?

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