1031 Exchange or pay the Cap Gains taxes!

Tax, SDIRAs & Cost Segregation
6yFollow

1031 Exchange or pay the Cap Gains taxes!

Jorge Perez
Residential Real Estate Broker · Miami, FL · Member since 2017 · 31 posts · 18 votes

I’m in the process of selling a commercial building and have been debating 1031 Exchanging into another asset or just paying the taxes and have huge capital in reserves and an even bigger purchasing power for the upcoming recession.

Is anyone debating these two decisions, would love to see different points of view since we are officially into one of the longest bull markets in history in the US and in many market places there are very few investments that make sense.

Thanks in advance for everyone’s insight.

For Context:

South Florida(Miami) market.

Multi family

Cap Rates

2Reply
41 views

Most Popular Reply

Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
6y

@Jorge Perez

Consider the 3rd option: Qualified Opportunity Zone funds. You can pocket the return of principal as capital reserve and roll capital gains into a QOZ fund, deferring taxes and opening the door to huge tax benefits long-term.

13Reply
See this reply in the discussion

34 Replies

Jump to latestLatest
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    6y

    @Jorge Perez

    Consider the 3rd option: Qualified Opportunity Zone funds. You can pocket the return of principal as capital reserve and roll capital gains into a QOZ fund, deferring taxes and opening the door to huge tax benefits long-term.

    13Reply
  • Jorge Perez
    OP
    Residential Real Estate Broker · Miami, FL · Member since 2017 · 31 posts · 18 votes
    6y

    @Michael Plaks

    Thank you for the insight and new choice. I will look into this option.

    0Reply
  • David M Trapani
    Rental Property Investor · Franklin, TN · Member since 2019 · 160 posts · 125 votes
    6y

    Why would you pay the tax?   Unless you are strapped for cash I would say do the 1031 tax free exchange. You’ll build assets & long-term financial security much faster in this fashion. Best wishes & good luck! 

    2Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    6y

    Don’t forget the ever so much fun 25% tax on the depreciation recapture, hurts way more than the usually much lower rate on actual gains. 

    1Reply
  • Eric Mayer
    Rental Property Investor · Clearwater & Daytona Beach, FL · Member since 2019 · 194 posts · 197 votes
    6y

    Why does everyone assume we are on the verge of a recession? We are more likely to have massive growth over the next 5 years. You can’t use the past as a guage for this economy as there has never been anything like it.

    10Reply
  • Carl FischerPro Member
    Rental Property Investor · Ambler, PA · Member since 2015 · 2k+ posts · 1k+ votes
    6y

    @Jorge Perez 

    The timing issue on 1031 exchanges can be problematic. In the last recession it was tough to purchase another property as banks made it next to impossible to borrow. Prior to that many sold high but also bought high -unless timing was almost perfect.  LTCG is low now and most likely will increase after 2025. Tough call maybe the best is to split the baby in half-pay some tax and 1031 exchange a percentage. How much do you trust your crystal ball?

    [email protected]215-283-2868
    2Reply
  • Jorge Perez
    OP
    Residential Real Estate Broker · Miami, FL · Member since 2017 · 31 posts · 18 votes
    6y

    @David M Trapani Thank you for the reply David. I’m very much leaning towards the 1031X. My train of thought is that I’ll have 12-17 months before the tax bill would even become due and I can get in and out of 3-5 low risk flips within that time that can cover the original tax bill. I’m just not in love with multi family right now as it is massively overpriced at the moment. Thank you again. Best wishes.

    2Reply
  • Jorge Perez
    OP
    Residential Real Estate Broker · Miami, FL · Member since 2017 · 31 posts · 18 votes
    6y

    @Bill Brandt Thank you for the reply! I’m lucky in this case as this asset was never depreciated because it was merely used as a holding company where I ran a separate business and ran the asset at break even. If I had depreciated it would be a no brainer to 1031X. Best wishes and thank you.

    0Reply
  • Jorge Perez
    OP
    Residential Real Estate Broker · Miami, FL · Member since 2017 · 31 posts · 18 votes
    6y

    @Eric Mayer I hope you are right but I’m just afraid of political climate around 2022 and beyond, plus geopolitical environment on top of the illiquidity in the financial markets. Also, at least in Miami, I have never seen this much cash in the street moving. In multiple industries, luxury products are flying off the shelf and in real estate down here there are an extraordinary amount of cash transactions. But again, I hope this market runs for a lot longer!

    1Reply
  • Jorge Perez
    OP
    Residential Real Estate Broker · Miami, FL · Member since 2017 · 31 posts · 18 votes
    6y

    @Carl Fischer I wish I had a crystal ball, it would make life a lot easier albeit a lot less fun! Splitting some funds of is a viable option and something I will take into consideration.

    0Reply
  • Ola Dantis
    Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes
    6y

    @Jorge Perez I would push for the 1031 option over the others but 1031 into a more nicer asset, which may weather a bearish market in the near term if this is what your fear is...  

    1Reply
  • Jorge Perez
    OP
    Residential Real Estate Broker · Miami, FL · Member since 2017 · 31 posts · 18 votes
    6y

    @Ola Dantis thank you for the reply the 1031X is the option I’m leaning into.

    1Reply
  • Scott Green
    Member since 2019 · 13 posts · 11 votes
    6y

    You have the same adjusted cost basis for selling your rental property whether you claim the depreciation deduction or skip it. Because of imputed depreciation, you may as well claim depreciation, even if you can't use it this year. You can carry the deduction forward to your future tax returns...Use the 1031, but find the right property.  I have an uncle who is an astute investor (CCIM), and he uses 1031's religiously.  However, he doesn't want the tax savings motivation to buy into a bad investment.  Keep searching for a solid investment, and use the tax deferral of the 1031 to your benefit.

    2Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    6y

    As Scott said. I’m 90% sure the IRS pretends you depreciated the property anyway. You’re going to end up paying 25% recapture taxes on depreciation you didn’t take. You may want to talk to a cpa about amending your taxes. 

    2Reply
  • Calvin OzanickBusiness Member
    Property Manager · Janesville, WI · Member since 2017 · 707 posts · 297 votes
    6y

    I tend to think that unless you are in need of the cash in a major way, why not use the tax-free funds to dive into something larger and ride the wave? It seems like the logical choice to me. I think your assumption of another recession is overblown, especially considering the last one was unprecedented and cannot be anticipated. Buying a larger cash-flowing asset makes sense to me as you ride a typical market cycle. 

    Wisconsin Property Managers4.7410 Reviews
    WebsiteView Page
    1Reply
  • Jorge Perez
    OP
    Residential Real Estate Broker · Miami, FL · Member since 2017 · 31 posts · 18 votes
    6y

    @Scott Green thanks for the in depth depreciation information. I will speak to my CPA about it to craft a better strategy. Appreciate the reply.

    0Reply
  • Jorge Perez
    OP
    Residential Real Estate Broker · Miami, FL · Member since 2017 · 31 posts · 18 votes
    6y

    @Bill Brandt will do 100%. We have definitely been leaving money on the table the last couple years. Thanks.

    0Reply
  • Jorge Perez
    OP
    Residential Real Estate Broker · Miami, FL · Member since 2017 · 31 posts · 18 votes
    6y

    @Calvin Ozanick yeah my worries are in fact sometimes overblown. It’s really my fear of stepping up to a larger asset that has me pondering the question at the moment but I’m almost sure I will execute an exchange. Thanks for the reply.

    1Reply
  • Brent Crosby
    Rental Property Investor · Farmington, UT · Member since 2018 · 171 posts · 148 votes
    6y

    @Michael Plaks thanks for suggesting this. I’ll have to look into it. This should be possible to do in all 50 states correct?

    1Reply
  • James Williams
    New to Real Estate · Charlotte, NC · Member since 2019 · 73 posts · 46 votes
    6y

    @Michael Plaks wow is that really feasible? I have some research to do. That sounds like a great plan.

    1Reply
  • Account Closed
    Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes
    6y

    @Michael Plaks wouldn’t you still pay taxes on the principle as taxable boot? My understanding is that you can’t pull cash out on a 1031 without triggering boot. Does that somehow not apply to opportunity zones?

    0Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    6y
    Originally posted by @Brent Crosby:

    @Michael Plaks thanks for suggesting this. I’ll have to look into it. This should be possible to do in all 50 states correct?

    Yes, all states have designated QO zones:

    https://eig.org/opportunityzones

    1Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    6y
    Originally posted by @Account Closed:

    @Michael Plaks wouldn’t you still pay taxes on the principle as taxable boot? My understanding is that you can’t pull cash out on a 1031 without triggering boot. Does that somehow not apply to opportunity zones?

    Your understanding is correct, but there is no 1031 involved. QOZ is an alternative to 1031.

    0Reply
  • Zachary Beach
    Specialist · Los Angeles, CA · Member since 2018 · 291 posts · 231 votes
    6y

    @Jorge Perez

    The ways I see not doing 1031 making sense is either. You need money now you can get with refi. You want out of real estate. (Maybe for good maybe for bubble.) or if you are going to do some form of brrr that you need the liquid and quicker refi and can make more profit than the taxes it costs you. If I’m not mistaken and if I am I would love to know it, but I believe it takes two years for 1031 before you can refi. killing brrr type deals or at least slowing them down. I believe the rule is you can refi but it can be considered taxable by IRS. Disclaimer I’m not a tax expert that’s just what google said. I hope there is a way around because i would love to brrr with 1031

    0Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    6y

    @Account Closed

    Ozones only have to have the capital gain invested. And it can be from real estate, Bitcoin, gold, any capital gain, not just real estate like 1031. The downside is you almost never own the property in an ozone, you’ll invest in a fund. If you buy a property you have to spend as much fixing the property up as you did buying it (usually pretty hard), or build as much as land costs (easier) whereas a 1031 can be your net proceeds plus $1 to be tax free. 

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free