1031 Exchange or pay the Cap Gains taxes!

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

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Michael PlaksPro Member

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

@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.

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Steve L.
Fairfield, CA · Member since 2016 · 29 posts · 22 votes
6y
@Jorge Perez In my humble opinion, anyone questioning whether or not they should pay capital gain, take depreciation, or if they have to wait 2 years after a 1031 should really sit down with their CPA to formulate a plan. I’m no CPA, but after doing an exchange last year and having to amend a tax return the year before due to failure to claim depreciation on a property previous property sale, I came to a few conclusions. I’ll never not claim depreciation, never chose to pay tax on gain of my own free will, and never sell in less than 13 months.
My view is, tax paid, whatever the amount, could have purchased x4 to x5 in property. Failure to consult a CPA can be financially devastating without even knowing how it’s affected your growth.
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Steve L.
Fairfield, CA · Member since 2016 · 29 posts · 22 votes
6y
@Steve L. I meat to write wait two years to do a post 1031 refi.
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Jorge Perez
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Residential Real Estate Broker · Miami, FL · Member since 2017 · 31 posts · 18 votes
6y
@Steve L. Awesome information Steve. I am early in the process but I do have to sit down with my CPA to craft out the best possible strategy. Thanks for the tips.
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Steve L.
Fairfield, CA · Member since 2016 · 29 posts · 22 votes
6y
@Jorge Perez No problem. I’ll also add, just because you plan to sit with a professional, it doesn’t mean you shouldn’t educate yourself by reading actual legal statute before your CPA meeting. That way it’s not a situation where you’re putting blind faith in your team member.
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JayCinta Henry
Investor · Mesquite, TX · Member since 2019 · 111 posts · 15 votes
6y
Lotsa great info here. Thanx everyone
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Jorge Perez
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Residential Real Estate Broker · Miami, FL · Member since 2017 · 31 posts · 18 votes
6y
@Steve L. Absolutely. That’s why I opened up this discussion to get some boots on the ground strategy from real life investors before starting this process!
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
6y
@Steve L., There is no two year seasoning period after a 1031 that you must wait to refi. The concern by the IRS is refinances immediately prior to a sale and 1031. This why some professionals recommend a 1-2 year wait after a refi and before a sale and 1031. Once a 1031 is complete it is perfectly fine to refinance as you are no longer taking profit out of a 1031. That is over. You are accessing equity by taking out debt. That is not taxable.

@Jorge Perez, Get thee to a cpa and talk about that depreciation issue. @Bill B. and @Scott Green are right. You're gonna get tagged to recapture any depreciation you took or that could have been taken. The answer to that is the 1031.
I know the question of when to time a 1031 in a market comes up all the time. But after all these years I'm not sure that's the question to be asked. The 1031 will work no matter the market. There are always deals to be found. If it's a bull market then yep you may have a tougher search. But you're selling at the top. If it's a down market then you can find good deals laying around everywhere. But you're going to have a tougher time initiating your sale.
So there's plusses and minuses to doing a 1031 at any time. The real questions are two - 1. What are your goals? If you want to reinvest then the 1031 always lets you use the deferred tax for your benefit. and 2. Is it time to sell this property. Each property and situation is unique by itself. Let each situation determine the best action for that instance and get out of the crystal ball business. It'll drive you nuts.
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Steve L.
Fairfield, CA · Member since 2016 · 29 posts · 22 votes
6y
Big thanks to @Dave Foster. He was more than accommodating as an accommodator in answering my questions leading up to my exchange last year. Particularly in his explanation of 1031 as a tool over multiple generations. It totally gave me new prospective.
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Jorge Perez
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Residential Real Estate Broker · Miami, FL · Member since 2017 · 31 posts · 18 votes
6y
@Dave Foster Thank you once again Dave! I think the predicting and worrying about the next recession has caused me more hard than good over the last year. I will connect with my CPA as the first step in my process.
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