1031 tax exchange. Any regrets?

[David Lant]

Anyone had regrets from doing a 1031 tax exchange?. I'm looking for some real-life experiences from people that have had second thoughts and the reasons why.    

[Rhonda Wilson]

We have done three 1031 exchanges over the course of 12 years. The first was a SFH into a 4-plex. The next was that same 4-plex into a 14-unit. We recently did another 1031 exchange from a 7-unit to a 14-unit. All of them were successful and I can't think of any regrets.

One of the most challenging things about a 1031 is the timeline restrictions - especially the 45 day identification period. It's a stressful time and you can definitely feel pressure to accept any deal that is reasonable instead of holding out for something ideal. One "trick" we've learned is that we write in the right to delay closing on the relinquished property. What we'll do is extend that closing until we are confident that we have found a property that we can purchase.  In our 2nd 1031, we delayed a few weeks. In the 3rd 1031 we didn't have to delay at all, but our PSA allowed us up to three one-month delays. Our realtor (who only does investment property) says that this is common because so many people do 1031 exchanges that buyers and sellers are understanding of these sorts of provisions. It's very different compared to the SNF market. 

The end result of our 1031 exchanges is an increase in scale which has led to  higher cash flow down-the-road. For about a year after the exchange, we generally see a net decrease in cash flow. However, once the property is stabilized and we start realizing rent increases, we net significantly more cash flow. After all, fourteen rent increases of $50 each is a lot more than four rent increases of $50 each.