When 1031 Exchanges Don't Make Sense

1031 exchanges acquiring deals financing a project multifamily financing real estate financing Dec 29, 2021

I had chatted with our 1031 exchange accommodator, Karen, and she said something that was interesting to me. 

She said, "50% of people that do 1031 exchanges do not need to do it."

I know that there's so much talk about 1031 exchanges and it can be so awesome... that you can get more properties, double your portfolio, etc.

Our advice: Talk with your accountant. Because you may be in a situation where you do not have to do a 1031 and put that pressure on yourself. 

Steve Olson: I've had that very same conversation with Mark Kohler, who's the most entertaining CPA there is, right? He's the only guy that can make taxes fun.

He told me that same thing, that for a lot of investors, the complexities of a 1031 exchange ultimately aren't worth it.

When I have a client considering it, the first thing I tell them to do is talk to their accountant and find out what happens if you don't do the 1031. Often, the accountant will email them back and say "hey, you're going to owe a tax bill of $8,200." And the investor realizes, "I'm not going to rush into some deal that I wouldn't do otherwise over $8,200."

Well, this is something that you talked about a couple of episodes ago when we were talking about valuing a deal, right?

  • What was somebody willing to pay for a deal?
  • What is it worth? 

And one of the big points is that. They could have a huge tax consequence. So the uncertainty of new construction in a build for rent deal, uh, sometimes isn't worth it on a 10 31, you're saying I'm going to have a $300,000 tax bill. If I don't close by day 180, you know what that attractive cap rate that comes with brand new construction may not be worth it to you. 

You may say I'll take a four and a half cap rate because I know I am saving that giant tax bill and I get a moderate return on my money. Along with it.

So when you're doing that build-to-rent development, you got to consider it. All these logistical, supply chain and labor things make it harder and harder and harder. 

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