1031 Exchange
1031 exchanges are a great way to defer paying taxes because you roll the money you’re making on a sale into another purchase and you can avoid giving money to the IRS right away.
This is ok with the IRS because they know they know they’ll get your money later on. However, you’re only given a short time frame to identify the property you are going to buy and six months to close on that piece of property.
Recently I had a client who was freaked out because he had a 1031 exchange and desperately wanted to buy a deal. I told him to calm down because he did not have to buy a deal.
Losing Deals
Don’t make the mistake of thinking you have to close on something in six months. Look at it this way- if you find the perfect property that you really want to buy and it works out and you can roll your money into that deal- that’s great! Do it! But ask yourself, “If i wasn’t in a rush and I didn’t have to do this deal to roll this money would I still buy it? If I had all year to make it happen would I still want to do this?” If the answer is yes; if the financing makes sense, if the cash flow is there, if the location works, if the repairs don’t look outrageous- proceed.
But if you’re doing this out of desperation, it’s not worth taking good money and throwing it to bad. I’d rather see you pay Uncle Sam his percentage. And it’s not as bad as it used to be. In a lot of places capital gains taxes are down 15%, depending on your scenario.
Of course everyone is different and I’m not an accountant but wouldn’t you rather pay IRS taxes then go into a losing deal?
After I shared this advice with the guy, he felt so relieved to realize that he didn’t have to buy a property now. Of course he could if it made sense, but if it didn’t it would be better to hold off.