would a 1031 exchange save me much in taxes?

Question

I'm asking this question because I'm getting different answers from different CPAs as to how much I would save. I'd like to sell one of my rentals and put the proceeds into stocks instead, but if the tax hit is too high, I'd do a 1031 exchange.

The gain on the sale of the rental property would be about $58k after expenses. For this year, I currently have about $131k in short-term capital losses outside of real estate. I have no other short-term gains to offset those losses.

Since I bought the property in 2019, I've written off about $13k in depreciation. How much would I save doing the 1031? TIA!

Michael Plaks · Answer

@Ryan Fox

Any CPA who gives you a numerical answer is making some assumptions, most likely generic and incorrect.

Your capital losses will offset your rental property gains, so a 1031 exchange will save you $0. All it will accomplish is push your gains into the future while keeping your capital losses locked up. Bad idea all around.

I wonder however how you calculated your gain of $58k. I'm afraid this is the cash you are expecting at closing. If so, this is not the gain for tax purposes. Your gain is your sales price minus your purchase price, adjusted for closing costs and improvements. Financing does not matter.

Account Closed · Answer

Assuming you didn't accelerate deprecation ( which your original post hints at you did not) you should not have any depreciation recapture.

Dave Foster · Answer

@Ryan Fox, It's probable that your capital losses will exceed the gain from the sale of your property. In that event you could sell the real estate and move to stocks without a tax hit. So no need for a 1031. But like @everyone said, you need to get the exact answers from your financial advisors.

Ryan Fox · Answer

Appreciate all the responses. I'll check with my accountant to be sure.

Sean Ross · Answer

@Ryan Fox, it's a consensus here. A 1031 exchange would likely only cost you a fee, plus impose rules on how to use your sale proceeds and when, without providing a tax benefit.

As @Michael Plaks points out, the way that you speak about the "gain" from sale means that you're likely confusing capital gain with net equity after expenses. I can't be sure, but it's an easy mistake to make at first glance.

Work with someone to calculate your actual gain from sale. If your actual capital gain (net sales price minus your adjusted cost basis) is going to be larger than $131K, then we can have a conversation about a possible 1031. I think that's probably unlikely given what we know.

Alex Olson · Answer

@Ryan Fox You really need to get with your CPA and TAX person to truly understand your whole situation. Lay it out for them in detail. They will be more knowledgeable that any of us here on the forum. Good to get a second opinion though.

Chris Picciurro · Answer

The answer is that a 1031 provides tax savings and/or deferral based on the situation. Proper tax planning involves diagnosing your situation the quantifying the strategy. Capital losses offset capital gains so it sounds like you are not a good candidate for a 1031. That said, if you are interested in a tax coaching session to work through the details please DM me. Good luck!

Jake Andronico · Answer

@Ryan Fox

Sounds like a 1031 isn't needed, but I'm not a CPA.

Sent you a PM.

Ryan Fox · Answer

@Michael Plaks- Yes, that is how I calculated the gain.

So I wouldn't owe depreciation recapture?

would a 1031 exchange save me much in taxes?

would a 1031 exchange save me much in taxes?

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