A 1031 exchange can solve a tax-timing problem, but the deadline can also create an underwriting problem.

Consider this hypothetical situation:

An investor sells a rental property and has approximately $300,000 of equity to reinvest. On day 38 of the identification period, the best available replacement property has:

• A 5.75% cap rate

• 65% leverage

• A significant lease rollover within 18 months

• Less operating reserves than the investor would normally require

• A projected return that depends on optimistic rent growth

The pressure to identify something is real. Nobody wants to lose a potential tax deferral after beginning the exchange.

But I think the most important question is this:

Would you buy this property if there were no 1031 deadline?

When evaluating a replacement property, I would be careful about relaxing standards in these areas:

1. Current cash flow, based on actual income and realistic expenses

2. Debt terms, maturity risk, and sensitivity to refinancing conditions

3. Tenant, lease, or occupancy concentration

4. Capital expenditure needs and operating reserves

5. The assumptions required to make the projected return work

6. The ability to hold through a slower market or unexpected disruption

The tax consequences matter, but they should be compared with the potential cost of owning the wrong property. A disappointing investment can be far more expensive than the taxes an investor was trying to defer.

Every situation is different, so investors should involve their qualified intermediary and tax adviser early. From an investment perspective, however, I believe the property still needs to stand on its own.

For those who have completed a 1031 exchange, what underwriting standard did you refuse to compromise on? Have you ever decided that paying the tax was preferable to forcing a replacement-property purchase?