Real Estate Sales: To Exchange or Not to Exchange

With the anticipation of rising interest rates, sky-rocketing oil prices, volatile markets, and political forces impacting the real estate markets, the frenzy to real estate commission rebate has impacted the sales portfolios is continuing, but at unprecedented prices, especially for waterfront & beachfront homes for sale in Fort Lauderdale. Daily, I’m asked two related questions: Should I sell and should I do a tax-deferred exchange?

Should I sell?

My response is always the same. “I’ll consult my crystal ball”. I pick up the snow globe on my desk; shake it, nothing but snow … It’s on the fritz. I ask questions back. Is the property performing? Is there a compelling reason to sell? When the response is that the property will never be worth the current value, the answer is simple, “Sell”. Will the bubble burst? Likely. When? I had better return and ask the snow globe. Ok, onto the next question.

If you’re selling because of gains beyond expectations, why jump right back into the flames just for the sake of doing it? What goes up is eventually going to come down. The only difference with real estate is will it outpace inflation?

Should I Consider an Exchange?

This is where I depart ways with some of my colleagues. I’m a bit of a contrarian, just ask my partners or my wife. That doesn’t mean I automatically pick an opposite, but I do shy away sometimes from conventional thinking and look under new “rocks” for new and fresh solutions to old challenges. When asked, “should I do an exchange”, most tax accountants will run a tax impact analysis. Because that’s what we do, we look at taxes. But we don’t always consider the economic effect of it, and look at alternatives.

If you’re selling because of gains beyond expectations, why jump right back into the flames just for the sake of doing it? What goes up is eventually going to come down. The only difference with real estate is will it outpace inflation?

Currently, we are midway through 2018; the answer to the question “should I exchange” is an absolute maybe. Why? Because there are so many more factors to consider. To answer complex questions involving real money, a basic tax projection doesn’t cut it; we have to carry the idea all the way through.

Two options: Exchange or Cash-Out.

1) Exchange:
Leverage up? Change property type? NNN or operating deal? IRR review? What are the underlying economics? Is there a tax benefit in the replacement property? Options that usually aren’t contemplated. Is there any personal property involved as the result of a cost segregation study that will be recaptured and considered boot? What are the true economics of the exchange pre-tax and after tax?

What about the new “opportunity funds”? If I wait, can I take advantage of these and extinguish my gains?

Are there also gifting opportunities that have been overlooked while there is a discountable asset?

2) Monetize Don’t Exchange:
What are the real economics of selling? How might this interact with previous qualified losses, with passive activity losses, and with the many new provisions in the Tax Cuts and Jobs Act? What is the break-even point if the funds are simply reinvested in AAA corporate bonds, while patiently waiting for market conditions to become more favorable to buyers? What do I gain by getting a total step up in basis? Sometimes paying some tax isn’t a bad thing, and sometimes the tax is less than expected. What about a seller carryback? An exchange near the end of the year (sometimes referred to as 1031 straddle) can be treated as an installment sale. The most important question often overlooked is what are the needs of the owners?

At the bottom of my email (signature), I post a quote from Steve Jobs about thinking differently. We are in a unique time. Not only are there the usual cyclical changes (interest rate changes, yield curve shifts, market shifts), but shifts in our economy between sectors that we could never have expected (resurrection in some, and collapse in others) require the savvy investor to think differently about how to approach deals today.

At Morris+D’Angelo, we’re not just another CPA firm. We don’t sell tax returns; We Sell Sleep.


Steven Geller

Steven Geller leads Morris+D’Angelo’s Southern California offerings from our Los Angeles office in addition to spending most of his weekdays at our Silicon Valley World Headquarters.

Geller provides and integrates high-level tax planning, compliance, and consulting. His specialties are with complex and complicated situations. He also leads the firm’s practice areas surrounding real estate including pre/post development structuring, tax-deferred exchanges, property management advisory services, and multi-generational transfers.

If you would like Steven to speak to you or your Professional Group and bring clarity about the new developments in your Professional arena, please contact us.

Morris+D’Angelo is the industry leader for many High-Wealth Customers and Organizations.

Steven Geller, tax planning, compliance707 SW Washington St., Suite 1100
Portland, Oregon, 97205

503.749.6300 – Portland Office
408.292.2892 – San Jose Office

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