Does anyone have any thoughts on whether it might be better to pay the capital gains tax and other taxes on the sale of an investment property rather than defer the taxes in a 1031 exchange? Assuming that I would eventually sell the last property at some point in the future. Although it is impossible to predict, there seems to be a good chance that capital gains and special gains tax rates may go up in the future so maybe it is better to get the taxes over with now. It’s kind of like the traditional vs. Roth IRA debate. I have heard it both ways… Are there other factors in RE? - Like the constraints of timing with the 1031 exchange? Other tax issues? Why would I ever want to sell anyway?
Some things to consider.
What is your marginal tax rate?
Are there tenants in common investments you can purchase that meet your needs? This can be held until your death and your heirs will not be subject to tax on the deferred gains.
Can you invest the proceeds into a tax exempt investment?
If your goal is to eventually divest yourself of all your real estate assets, then paying the capital gains now when the tax rate is a known and very favorable quantity makes sense.
But, you are asking about paying the taxes versus a tax deferred exchange. Suggests you are not ready to get out of the real estate business just yet. If so, then when you sell now and pay taxes on the sale, you will still purchase another property. Another property which you will eventually sell and pay taxes again.
So, your question is whether to pay taxes now and then pay taxes again when you sell again in the future, or, pay nothing now and pay a lot more later. Seems like it could be a wash – pay the taxes in two installments, or, pay in one large lump sum.
If you are not getting out of the game, then I like the idea of deferring taxes as long as possible. Who knows, you may never sell and never pay any taxes.