Updated: Sep 1, 2019
They aren't always the best option during the sale of a property. When used wisely, the 1031 is an awesome tool for retaining and utilizing more capital earlier on in your investing career. Though don't let what might be a small cost derail your path to success.
Answer 2 vital questions before going down the 1031 path:
How much will you actually pay in taxes upon sale?
What is the state of the market for viable purchases?
I am forgoing a 1031 tax exchange on a rental we're disposing of because my tax liability will only be 3.5% of the total sales price and the sale price is less than $500,000. I don't enjoy paying taxes when it's unnecessary but the benefits of cashing out outweigh the costs in my situation this time around.
The 1031 exchange can really facilitate moving to the next level of investing. The challenge is locating and securing that next investment that meets both the IRS requirements and your strategy. This isn't an easy task to do. Don't get stuck with a property because it was the "right" price and looked like a good deal. Stick with your wheelhouse and your game plan to minimize risk and maximize long-term wealth creation.
An alternate option to the standard 1031 exchange would be a reverse exchange. The next property would be purchased first then the sale of the original property would occur. My knowledge is limited on this subject. I would assume that similarly, the reverse exchange has its set time frames and guidelines that have to be followed that could be just as restrictive as the standard 1031 exchange.
Our brokerage office supports clients going through 1031 exchanges on many transactions but we advise clients to utilize the team of attorneys and CPAs that specialize in exchanges to assist with the process.
Individual tax situations and transactions will highly vary so definitely speak with your CPA to see the tax implications for your specific tax strategy.