Are the savings worth executing a 1031 exchange?

Question

I am contemplating doing my first 1031 exchange with a rental I have owned for the last 8 years. The cost basis will only be ~$35k so the taxes would be around $7000 (live in NC).  While the tax benefits might not be huge, I thought the value of the experience would be worth it.  I would be looking to exchange the one property for two new rentals. Any advice would be greatly appreciated!

Dave Foster · Answer

Thanks for the shout out @Jaysen Medhurst.  I love people who are always trying new things @Megan Elliott.  Especially when you're searching for the strategies that will be of most benefit to you in developing your portfolio and real estate investing career.  That's awesome.

You're right $7000 isn't the biggest tax hit in history.  But what is someone told you that since you were going to go to the story anyway they would give you $7000 to go to the store?!!!  That's what the 1031 could do for you.  You're going to buy new investment real estate anyway.  The 1031 process is seamless for you ( you market and sell and then shop and buy like normal) other than having a qualified intermediary to guide you through some procedural hoops.  And for that you get to keep $7000 of your money to be used for your own benefit.  Not a bad day at the track!!

Another way to think of it is what that $7000 represents.  If you pay it in taxes it represents nothing to you.  But if you get to keep it and make say 10% a year (just cause it's easy math for me) then that's $700 a year you get to use for yourself.  Do that a few times and it turns into real money real quick.  And remember the 1031 is indefinitely deferred.  So you can keep the benefits of that deferred tax as long as you live and beyond.

If you're not looking to reinvest then that's another story - but if you're going to go to the store anyway - why not pick up a painless free $7000 and learn something new along the way that could be a huge tool for you ongoing!!!

Warren Z. · Answer

$7k is worth it to me! That would pay for closing costs and some rehabs on your next property. The 1031 fee is minimal in comparison. @Dave Foster helped me with my reverse 1031 where I sold one property and purchased two last year. Highly recommend!

Jaysen Medhurst · Answer

@Megan Elliott, since you plan to buy two new rentals, it's probably worth the trouble. The cost to do a 1031 isn't too dear. Opportunity Zone Funds are an option, as @Michael J Scanlon pointed out. That wouldn't be my first invest choice given all that's going on right now, but that's just me.

@Dave Foster, is one of the go-to 1031 guys around here. He has all the answers.

Dave Foster · Answer

@Megan Elliott, a QI's actual work will be performed as part of the closing process.  So once a contract has been executed and escrow has been set up is the perfect time to officially involve your QI.

But leading up to that there can be so many questions, strategic options and potential courses that you will want to have early access to your QI so they can answer questions and prepare you adequately.

Michael J Scanlon · Answer

It depends on your goals. If you are going to take your profits and invest them into property anyone, then yes do a 1031. It will be more stressful and you must make sure you follow all the rules obviously but no sense in paying taxes when you were going to buy more property regardless. Now, if you were unsure of cashing out vs reinvesting, then that has to be a decision you make. Remember, you can always passively invest your money into an opportunity zone fund and save yourself a lot on taxes rather than doing a 1031.

Alyssa Dyer · Answer

@Megan Elliott good luck with this. Glad you were able to get the exact advice you needed here. BP is incredible and @Jaysen Medhurst is right that Dave does seem to have all the 1031 answers! Are you replacing in NC? How's the market doing among covid?

Alyssa Dyer · Answer

@Megan Elliott oh good to hear!! What are returns like there?

Megan Elliott · Answer

@Alyssa

@Alyssa Dyer thanks so much for the encouragement! I am replacing in NC.  The market seems to be doing okay with COVID since much of the turnover comes from military bases.  Orders got pushed back a bit but they are will still need to be executed.

Megan Elliott · Answer

Thanks so much for all the great responses!  How far in advance do you recommend setting up an intermediary?  I am planning on putting my home on the market in July.

Are the savings worth executing a 1031 exchange?

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