1031-When does it make sense to NOT exchange?

[Christy Winchester]

When does it make sense to NOT complete a 1031 exchange?

I have acquired a vacation-esque property in an exclusive gated neighborhood.  I plan to sell this home. I expect to walk away with 400-500K but my investment strategy is on the conservative side and I don't see me purchasing another property with similar value any time soon (I don't play in that arena yet-but remember my name so you know me in 10 years).  Not even two or three properties to equal said amount.  I (like you, dear reader) can't speculate on whether I can actually sell it this year due to the market but again, I would like to do so.  

So, what do you think?  What else do I need to consider?  What am I missing?  TIA for helping me think through this.....

[Dave Foster]

@Christy Winchester, I feel ya.  It's never a bad time to take money off the table.  And using your capital to pay down debt and improve another investment at what you feel is a strategic time is a good thing (in spite of what you'll hear from all the leverage jockeys around).  But it's also never a good time to sell and pay the tax.  

the 1031 would let you shelter all the tax.  And maybe there's a path to get you where you want to go and defer the tax.

One option would be to do a complete 1031.  You'll need to purchase at least as much real estate as you sold.  But it could be multiples of properties instead of just one.  and you can allocate your proceeds in any way you want. I can't tell if you have debt at all.  But you could purchase 3 properties for $175K ish.  Once you complete the exchange then do a refinance and take that cash to either pay off one of the other houses or use it for your renovations.  Yes you end up with debt still.  But it's debt spread judiciously.  and you didn't pay the $100K or so of tax.

Option 2 - Do a partial exchange.  Take enough cash as "boot" to do your renovation.  Then do a 1031 exchange with the rest.  You'll have to pay tax on the cash you take out.  But you'll shelter the rest of the profit in the next purchase or purchases.

Either way you done well.  No one ever went broke paying tax on profit.  But I hate taxes enough myself that I'd go kicking and screaming rather than write that big tax check.  Avoid it if you can find another way.