To 1031 or not?

Question

I'm on the fence and wanted to seek the wisdom of the crowd. We are listing a property for sale and are considering whether to 1031 into the next one or just pay the taxes, sit on the cash, and move at our own timeline. Any thoughts or opinions?

Tax bill will likely be $25-30k

Pros of 1031:

1. Tax savings, obviously,

2. Behavioral finance - if we do not see a big pile of cash, we will not feel the impact, and will not go do something like buy a new car or another frivolous expense.

3. Allows and kind of forces us to get into a higher level of asset. Buying a 600-800k property that would be really painful doing the traditional 20% down...allows us to get into something like that with a more palatable mortgage.

Cons of 1031:

1. Shorter timeline, fewer options.

2. If the savings is $25-30k, I feel like I can make that back by being patient and having more cash on hand.

3. Greater sense of control, more liquidity, added peace of mind. I'd probably keep half of the proceeds in cash and half in VTI. We are also slowly working on a development and new construction project on a property that we already own. Some of the extra cash would go toward that.

Dave Foster · Answer

@Travis Timmons, before even considering investment types and market conditions moving forward, you really want to ask yourself what your ideal investment portfolio looks like in the future and how this decision aligns with that goal.

The 1031 exchange can fit into many strategies and is an awesome tool for building a RE portfolio as well as consolidating one. If you did decide you want to do a 1031, you can allocate the proceeds however you want. If your proceeds are $800k, you can purchase two $400k replacement properties if you wanted. Or, as you mentioned, if you wanted to move into multi-family or commercial, that's an option.

You also mentioned having cash for other projects, and as you know, in order to defer all of the tax, you must leave all of your proceeds in your exchange, but if you needed to access some cash, you could always complete your exchange and immediately do a cash-out refi. That gives you access to some tax-free cash.

$25K isn't life-changing money. But it's real money. And for the 1031 investor, it's all about the compounding of that money and the money you make off of that money. Timelines and pressure can make it feel tight. But that's where you have to steer yourself to let an exchange die. Spending a grand to potentially shelter $25K isn't a bad choice. If you can't find something you like - let it die. Most of our clients (90+%) make it work. So the odds are in your favor

Travis Timmons · Answer

Thanks all for the thoughtful responses.

@Aaron Zimmerman We have 4 other properties, I do not have REPS status, and we have already done a cost seg on the other STR. Our likely next move is to develop the land on our current live in flip/fixer. We can get 4 additional lots and start the process of building on those. That seems to get the best return vs. the alternatives though I have not fully penciled it out to figure out what size and type of housing has the best ROI. Oddly enough, the new construction and a likely move to your city next year due to aging parents (and purchasing a 2-4 unit) are the most probable next steps.

@Becca F. The $600-800k would be a higher end single family home another STR (which is what this property is - lakefront that squeaks out a small return but has $250k-ish of equity in it). The downside of that next purchase would be that it's going to take $50-80k of furnishings and renovations in most cases.

Becca F. · Answer

Thanks for pointing that out Bill. I realized it's August and I'd be rushed to buy something in the calendar year for lazy 1031. I looked up cost segregation studies on a $500k property and Google said $500 to $1800 for desktop cost seg and a $3000 to $7000 for a traditional engineered cost seg study.

My original plan was to exit Indiana and 1031 to buy in Nevada. I flew out to Vegas and drove to Reno in 2025 to look at properties with agents (in the $420k to $570k range) and the numbers didn't work (cash flow negative on long term rentals with 20 to 25% down at 2025 to current interest rates) and hoping the rents would increase significantly and not be negative each month in the next few years.

Then move into the Nevada house after renting it out for several years (???) as my primary to retire/semi-retire for the no state income tax and general lower costs reason but that's a lot of ifs (taking negative cash flow for years) and I might just stay in California. That's when I scrapped the idea of 1031 to Nevada property.

Henry Clark · Answer

OP if you don’t already have an investment target I wouldn’t do. Or if your type of REI is not target rich in your area. Also the potential deferral, not savings is not worth it.

If you move forward. If your property is an easy sale in the timeframe of 1031. You might do a reverse 1031. Buy the next property then sale yours. This takes the pressure off. But puts pressure from the money side to fund the purchase. You have to work with a lender on both sides of the sale and purchase.

We had land at $1,000/acre and sold at $3,000/acre. We knew we could get more and it would be easy to sale. We purchased land we wanted first as 1031, them sold ours. Worked with the same bank to buy and to sale (collateral for the buy).

Ashish Acharya · Answer

Travis, with a projected tax bill of roughly $25K to $30K, I would not do a 1031 just because you can. I’d compare the value of the tax deferral against the value of having liquidity and being able to wait for the right next deal.

One distinction I’d make is that a 1031 is generally a tax deferral, not permanent tax savings. The deferred gain carries into the replacement property through basis, so you’re preserving more capital to reinvest now rather than eliminating the tax. Your own 1031 guide makes the same point: the benefit is deferral, not elimination, and the reduced basis follows into the replacement property.

Given that you already have another construction project and value having cash available, paying $25K to $30K may be perfectly rational if it buys you flexibility and keeps you from forcing a replacement purchase during the 1031 timeline. The IRS requires replacement property to be identified within 45 days and generally acquired within 180 days, and the sale proceeds need to be handled through the exchange structure rather than received directly.

There may also be a middle ground. A partial 1031 can allow you to take some cash out and recognize tax on that portion while potentially deferring the remaining qualifying gain. The IRS confirms that if cash or other non-like-kind property is received, gain is generally recognized only to that extent.

Before deciding, I’d model three scenarios: full 1031, partial 1031, and taxable sale. Include capital gains, depreciation recapture, any suspended passive losses, how much liquidity you actually need for the construction project, and the return you expect from the replacement property. If the next deal is mediocre, saving $25K in tax today can get very expensive.

Happy to connect!

Becca F. · Answer

I'm in a similar situation but mine was list the property for sale (amazing long term tenant is moving) vs. rent it out again.

My projected capital gains tax bill is $22k to $26k.

My CPA mentioned a "lazy 1031" exchange. If I'm understanding this correctly, I wouldn't be under the timeline of a typical 1031. I'd have to buy a new property before December 31st (the calendar year of the sale of property), do a cost segregation study then a bonus depreciation. The proceeds aren't held by a Qualified Intermediary. The paper losses of the new property would offset the capital gains of the sold property.

I've also heard of an installment sale where the gain is spread out over a few years but this would complicate things for the seller, buyer and your lender (assuming you have a loan).

For me I just wanted to simplify my life and it's an out of state property, Class A, great appreciation. I'm deciding to sell. There's a 5% chance I'd do the lazy 1031 exchange but mostly likely take the tax hit and stay liquid with the proceeds (index funds and HYSA).

I don't think there's a right/wrong answer of 1031 or not, depends on the investor's goals.

With a 1031 and choice #3 of buying a $600k to $800k property would that be a multi-unit? What does the pro forma on those potential properties look like?

Jules Aton · Answer

I’ve considered but the time crunch makes me anxious and I don’t want to feel like I am pressured into buying something. In reverse like @Henry Clark mentioned is interesting so I’m going to keep that in mind. Although I don’t like writing a 25k tax check I’m also ok with it because it means I made a chunk.
PS I’m doubtful #2 on your list is a real concern ;)

Dan Handford · Answer

Your point about patience and control is important. I would establish the replacement-property buy box before the sale and decide which standards cannot be relaxed. Then begin the exchange only if you are genuinely willing to let it expire when no suitable property appears. That preserves the opportunity to defer taxes without turning the deadline into an obligation to buy. Looking ahead five years, which result would bother you more: paying the tax and waiting, or completing the exchange into a property you would not otherwise have purchased?

Jason Malabute · Answer

If you've got other properties in the mix, one route that lands close to a 1031 without being tied to the exchange clock is to sell, buy a replacement rental this year, and run a cost segregation study with bonus depreciation so the paper losses help offset the gain. The catch is timing, since you'd need the new property actually acquired and placed in service by year-end, so it's a tighter window than the 1031 timeline, and how cleanly those losses offset really depends on your full tax picture that year. Whether that beats simply filing the 1031 and letting it expire if nothing fits is ultimately a numbers question, so I'd model both paths with your own CPA before pulling the trigger.

Bill B. · Answer

@Becca F. The following is my understanding, far room an expert:

That might work for something you haven’t owned very long as it wouldn’t offset the depreciation recapture you would owe on your sale. Plus once you’re in July or later you’re under the same time constraints. You have 180 days to close your 1031 so you already have past January 1st 2027 to close. Plus most 1031’s are cheaper than cost segs. Plus, when you recapture cost seg depreciation it’s taxed at a higher rate. Plus if you ever want to 1031 that property you’ll have to do another cost set on the replacement property if you want to avoid 1245 depreciation recapture. I’m not saying it can’t be done or even it shouldn’t be done. It just seems like it’s always explained as a simple 2 step process and you’re done by its proponents.

OP: Why are you selling the current property? Are you counting depreciation recapture and capital gains, state and federal taxes in your estimate? If so, is there no property for sale that you would like to buy at a $30k discount?

Lastly, you can file for the 1031 with your sale, if you don’t find anything you just let it expire. You’re out a $1,000 give or take. No big deal. If you want to quit investing that’s fine. But it’s going to be hard to make up $30k if you decide to buy something in the next year. The only way deals get better next year is if the economy tanks and you decide that’s a great time to invest. In that case you should probably sell all your real estate including primary and rent. Otherwise you will have just paid taxes and lose rental income and depreciation on what you could have bought.

To 1031 or not?

To 1031 or not?

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