Does a 1031 exchange actually make sense, or should I just pay the tax?

Question

Turnrow Capital · Accepted Answer

Exchange when the deferred tax is large and you intend to stay in real estate; pay the tax when the gain is small, you want liquidity, or the deadlines would force you into a mediocre property. Rough threshold: combined tax under about $50,000 often is not worth the constraint.

Price both sides. The exchange costs $1,000–$2,500 in QI fees for a standard deal, plus the real cost: 45 days to find property and 180 to close, which weakens your negotiating position and can push you into overpaying. Sellers can smell an exchange deadline. Overpay 5% on a $1M replacement and you have spent $50,000 to defer tax you might have financed for less.

The exchange wins big in two situations. First, large gains with long horizons — deferring $300,000 of tax keeps that capital compounding in land instead of gone. Second, the estate play: hold replacement property until death and current law steps up the basis, converting deferral into genuine elimination for your heirs. "Swap till you drop" is a legitimate strategy, not a joke.

Paying the tax wins when you want out of real estate, when losses or low brackets shrink the bill, or when the only identifiable replacements are properties you would not buy without a deadline. A bad farm bought to beat day 45 costs more than any tax. Run both scenarios with your CPA before listing — the decision drives the sale structure.