When Doesn't it Make Sense to do a 1031 Exchange

[Ben Hutto]

I hear a TON about how 1031 exchanges are a great way to defer taxes + grow your portfolio faster. I've never done a 1031, but understand the logic and benefit behind them. I also understand some of the restrictions associated.

On the flip-side, I haven't heard many negative things about 1031s (other than the obvious restrictions).

Are there situations where it's better to avoid a 1031? Maybe if you don't have much equity? What other negatives exist with 1031s?

Thanks!

[Dave Foster]

@Ben Hutto,  Sometimes it's actually beneficial to do an exchange even if you don't have any equity because equity is not a determiner of gain.  It is possible to have refi'd something to the point where there is little equity but a lot of gain.  Similarly it is possible to sell a long held property at a loss but still need to do an exchange to avoid depreciation recapture.

But those are more reasons to do an exchange.  When not to do an exchange:

1. If there is no gain and no depreciation to recapture.

2. If you have pent up losses that can offset the gain.

3. If you can't find a suitable replacement property

4 If you are determined to leave real estate investing.

5. If the gain is small enough that it is more hassle than it's worth.

6. If you like to pay taxes  and would rather build highways and buy guns than invest the money for yourself :)