Almost every investor I speak with comes to the conversation assuming a 1031 exchange is the right answer. It usually is. But if I never told anyone it wasn’t the right answer for their situation, I wouldn’t be doing my job.
Twenty-five years in this business has convinced me that the sharpest advice is often about what not to do. Here are the situations where a 1031 is worth a hard second look — or worth passing on entirely.
When your basis is low but your health outlook is long
A 1031 exchange defers taxes. It doesn’t erase them. What can erase them, under current law, is the step-up in basis at death — if you hold the property (or a like-kind successor to it) until you pass. That’s the “swap till you drop” strategy, and it’s a powerful piece of estate planning.
But if you’re in your 40s or 50s, in good health, and your deferred gain is modest relative to your overall wealth, you’re making a very long-term bet on how the tax code will look 30 to 40 years from now. That’s a defensible bet, but it’s worth naming as a bet. Sometimes paying the tax and simplifying the balance sheet is the cleaner move.
When the replacement property market isn’t healthy
The 45-day identification window doesn’t care whether it’s a good time to buy. If you’re selling into a strong market and being forced to buy into a market where sellers still have unrealistic expectations, an exchange can push you into overpaying for a replacement just to avoid a tax bill.
The point of an exchange is to defer taxes so you can compound better returns on the whole amount. If the replacement forces a worse investment, the math doesn’t save you.
A DST replacement can help here, because you’re not competing on the individual property market. But even DST inventory varies in quality over time. If nothing in the market looks compelling, a taxable sale isn’t a failure — it’s a legitimate answer.
When the tax hit is smaller than you think
Investors sometimes assume the entire sale price is exposed to tax. It isn’t. The taxable gain is roughly the difference between your sale price (net of costs) and your adjusted basis (original cost plus improvements, minus depreciation you’ve taken). If you’ve owned a long time or improved the property significantly, the actual tax bill can be smaller than the mental picture.
Add in the fact that not all of that tax is at capital gains rates — depreciation recapture is taxed at a different, generally higher, rate — and the honest answer requires running the numbers. Sometimes when we run them, the deferral isn’t worth the complexity.
When you need the cash
A 1031 exchange requires you to reinvest all the equity to fully defer the gain. If you take any cash out — called “boot” — it’s taxed. If your reason for selling is that you need liquidity for something else — a business investment, a home purchase, a life transition — forcing a full exchange to protect the tax deferral can defeat the purpose of the sale.
There are partial exchanges that let you take some cash and defer the rest, but they need to be structured carefully. Sometimes the honest recommendation is: take the liquidity, pay the tax, and let the tax bill be the price of the freedom.
When the seller wants to hold seller financing
Seller-financed sales — installment sales — interact with 1031 exchange rules in ways that get complicated fast. If you’re planning to carry back a note for the buyer, and also planning to exchange, the interaction between installment reporting and the exchange rules can produce results that surprise everyone at the table.
It can be done, and I’ve seen it done well. But if the exchange is being tacked onto a deal structure that’s already complex, that’s a moment to slow down and confirm the math with your CPA before signing anything.
What independent advice actually means
Every scenario above is one where a 1031 exchange — a product I work with every day — may not be the right recommendation. If your advisor can’t articulate when a strategy doesn’t fit, you should wonder whether the recommendation is really about you. At Carmona Wealth we’re independent, we don’t sell proprietary products, and if the honest answer is “don’t exchange this time,” that’s the answer you’ll get.
The takeaway
A 1031 exchange is a genuinely powerful tool. But like any powerful tool, it’s most effective when you use it deliberately — not by default. If your situation genuinely calls for it, we’ll execute it carefully. If it doesn’t, we’ll say so and walk you through the alternative. That’s what you’re paying for.
Dave has spent 25+ years in the alternative investments industry, with senior sales roles at Cantor Fitzgerald, NexPoint, Realty Capital Securities, KBS Capital Markets, and Independent Portfolio Consultants (AXA). He holds a B.A. from Harvard University and an MBA from the University of Pittsburgh.