Is 1031 exchange best?

5 Replies

I'm looking to sell a rental property which has not been a primary residence in the last five years and trying to figure out what is the best next step.  Should we 1031 exchange and keep growing the RE?  When is it worth it to pay the taxes and take the money?  What is you experience with selling Rental Properties and how to keep growing?  

@Marian Freshour can I ask a simple question?  How much tax liability would you face without a 1031?  Or I can help you figure this out on the fly.  1031 exchanges are not a panacea -- they impose limitations in more than one way -- but there is a reason they remain so popular.  The calculus is very different if you have to write the IRS a $20K check vs a $500K check. 

@Marian Freshour , You don't want to forget depreciation recapture since you''ve been using it as a rental for at least 5 years.  That will add substantially to your potential tax burden.

The answer to your question is an opportunity cost question.  Your tax burden could be anywhere between $30K - $50K on that kind of gain.

If you keep the tax working for you in a 1031 (to an upreit or any other real estate investment) how much will you make off of that deferred tax and for how long.

Compare that with the kind of investment you could get now if you didn't use a 1031 and paid that tax.  How long would you have to be in that investment before you recouped that $30 - $50K in tax?

Usually the issue isn't the amount of tax.  It's the amount of profit you are either missing out on or able to get by paying or not paying the tax.  You have to analyze the opportunity.

I've had investors pay hundreds of thousands of dollars in tax because it didn't meet their timing and investment considerations.  And I've done a 1031 for an investor when her tax was $500 more than her 1031 cost.  In her words - "yeah but it's my $500 and I want it".


Upreits can also be researched by the IRS code - 721