How often should you 1031

7 Replies

I'm new, but it seems to me that in general Real Estate doesn't make much sense without loans. It seems that by using your cash as a down payment on a loan, you are able to get a bigger property with better cash flow, while at the same time gaining equity as you pay off the loan. If this is the case, then there has to be a balance of how long you want to hold onto a property before cashing out and 1031ing into something bigger. The closer your loan is to being paid off, the more it makes sense to go ahead and sell and 1031 into something bigger. You don't want to do this too often though, because there are a lot of closing costs that take time to make up for. Are there any mathematical heuristics/guidelines for how often you should 1031? Of course it will depend on several variables like closing costs, quality of property, loan lengths, etc. Let's say the quality of property is equal for the sake of simplification. Thanks!

@Kevin Wheeler , Excel is the little g god of real estate planning.  Worship it, use it and have fun staying up till all hours building Pro-formas.   Kind of like Fortnite only with real cash on the line!!

Everything you're talking about is absolutely a critical component.  That makes it a tough nut to put into one calculator.  We're developing some on But the difficulty is that they need to be built one off each from a different approach to be effective - Finance, Sales realization and expense, operation Expense, NOI, ROI, and ROE, and appreciation.

I'm going to sound like some kind of mountain dwelling mystical sensei but if you focus on the destination you can see the various paths that get you there.  Then you can trace back the path the the property you're concerned with and your excel proforma can tell you if and when it's time to dispose.  The nice thing is that the 1031 allows you to do this even imperfectly and still avoid all the tax - so even if there's punishment its usually opportunity cost and not a painful eye gouge.  Or just very simply, as Stephen Covey said - "Begin with the end in mind".

Loan payoff and 1031.What?This is like a minor detail that is a factor but who careS. 

Most people, my self included start thinking about exchanging where big time appreciation has happened. 

@Kevin Wheeler , the problem with looking at equity (loan half paid off) is that it is not an indication of your tax liability at all.  Your loan could be paid off but if it hasn't appreciated then you're only dealing with depreciation.  That might be significant or not.  

It's the combination of appreciation and depreciation along with your goals that should determine when and how to sell and use the 1031 if appropriate.

@Kevin Wheeler only looking at the loan payoff is the wrong way to look at it.  There are other considerations to keep in mind, like closings costs, which you mentioned, asset class, location, cash-flow etc.  But the most important one is appreciation.  Finding another asset to 1031 into as simple as snapping your fingers.  

A 1031 is about protecting capital appreciation, and not the only way to do so.  If there is little appreciation, but a lot of built up equity through loan payoff, you can cash-out refinance to tap into the equity.

I'm so new at this, so thanks for helping. My basic thought was that by using loans, you are able to get a much bigger property and get a better cash on cash return than you would if you bought a property without a loan using all cash.. while also building equity as the loan is paid off. Is this even true? And if it is, it would seem that once a loan gets closer to being paid off, you basically have a bunch of cash at your disposal to put into a down payment on another loan. Having a paid off loan is similar to buying a property with all cash. You would rather take that cash and use it as a down payment on a loan for a bigger property with a better cash on cash return. But you don't want to pay taxes when you do this, so you 1031. But as per Scott Wolf's comment, it sounds like you could just get a cash out refi and use that cash as a down payment for a loan on another property without having to sell your current property and 1031. This however would probably negatively affect your cash flow more than 1031ing. Or maybe there is some balance of not fully cashing out that achieves the same result. For some reason I had the idea in my mind that you could actually increase your cash flow by taking the money from a fully paid off property and using it to 1031 into something bigger, meanwhile gaining equity as well as you pay off this new loan.

@Kevin Wheeler , you can - that's the theory.  the reality lies in the quality of the new investment, the ongoing expense of the old investment, the prognosis for the market, the old investment, and the new investment, the specifics of the new loan and the multitude of x factors.  It's an art.  And it's custom.  Forget you ever heard of a 2%, 1%, .5%, or any other rule.  Look at each deal as it comes and in light of the market at that instant.  It's more work but ever so much more accurate and effective.