Why I chose to NOT 1031 exchange

[Patricia Andriolo-Bull]

Thought I'd share my recent decision to not complete a 1031 exchange and get your thoughts.  I recently sold an investment property with net proceeds of $1.8M.  Cap Gains on this will be ~$400K. 

1.  I was having trouble finding great deals.  I wasn't excited to put another $1.8M into the market today - I was having a hard time finding truly good deals.  It started to feel like the tail was wagging the dog and I was only making investment decision to defer capital gains.  Taxes are never the right reason to make good financial decisions.

2.  Current interest rates are high.  While the cost of the fixed cost of the 1031 exchange wasn't a lot, the fact that the intermediary keeps the interest on the escrow (at least the two QIs I spoke with both did), in today's market this was significant for $1.8M.  After doing the math, putting the entire amount into CDs which mature in 2024, in less than one year, I can achieve almost the entire amount due for Cap Gains by keeping my own cash.  Also, pushing the CD maturing into 2024 keeps me from paying taxes on interest received until 2025.

3.  2022 capital losses carried over.  I had some substantial investment losses in 2022.  While my investments are up this year, I will use tax loss harvesting strategies to help offset the hit from the sale on my investment property this year.

I will still invest some of the proceeds of the sale in properties as the opportunity arises, but now I am able to reset my basis and not worry about the large cap gains hit or continuing to put that large of a nut into continual 1031 exchanges if I decide to sell in the future.  If the dynamics above were different, I may have made a different choice.  What do you think?

[Jeff Nash]

@Patricia Andriolo-Bull you provided a nice summary of your rationale for not utilizing a 1031 exchange and like some others have mentioned, I think #3 is the most compelling and overlooked. It seems like many folks get unnerved about the potential adverse tax effect of a real property sale because they only consider the transaction in isolation rather than taking into account their total situation (carryover capital/passive losses).  That's why it's important to involve a tax professional upfront as you consider an exchange and not tell him/her after the fact.