1031 Exchange Versus Cashing Out
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Steve Rosansky put together a comparison of what could be a common scenario to show the advantage of doing a 1031 exchange versus cashing out.
In this example he makes the assumption that a California real estate investor has owned an investment property free and clear with no debt for long enough to qualify for the long term capital gains rate and will have $500,000 in net proceeds after closing. He also makes the assumption that the property has $500,000 of capital gain and $200,000 of this gain is due to depreciation recapture.
As he illustrates in the attached example, the investor who exchanges can obtain considerably higher investment returns from deferring the payment of capital gain taxes. Steve also states that “the current low rates for financing provide a unique opportunity for investors to lock-in excellent loan terms. Investors should explore the possibility of exchanging before closing on the sale of investment property”.
On the contrary, there are good arguments for just cashing out and paying the capital gains if you feel certain that the cap gains rates are going to go up before you sell. In other words, if you think the Democrats are going to win the POTUS and the House back next year, you pretty much can count on the capital gains rates to go up dramatically so cashing out and paying today’s capital gains rate might not be a bad idea.
