How to defer taxes and optimize your 1031 exchange Accounting Today wrote about, a site which helps minimize taxable gain and maximize tax deferral for a 1031 exchange.
This online application from T-Rex Global makes it drop dead simple to fill out the paperwork with guided assistance to produce both the nightmarish IRS Form 8824 and an exchange report that explains the different elements (Boot, Taxable Gain, Deferred Gain, etc) of an exchange.
Below is the blurb from WebCPA:
Like-kind exchanges of real estate are getting a lot of play these days, but the accompanying paperwork is so fiendishly complicated that it may make you wish you’d built a new building instead. Single-handedly. In the dark. T-Rex Global’s free online application Defer’Em aims to take the pain out of the paperwork, with guided assistance to produce both the nightmarish Internal Revenue Service Form 8824 and an exchange report that explains the whole transaction to clients.


I am glad to see that you have implemented several changes to your online application over the past year. Tremendous improvement in the clarity of the 1031 report, especially when multiple replacement properties are involved in the exchange.

Good job.

Do any of you guys ever wonder whether Sec. 1031 really makes sense?

Here’s my thinking…I observe that many real estate investors do decide eventually to sell–perhaps as they head into retirement. So many people will eventually realize the gain (rather than let their estate deal with issue).

And taking a gain today (when long-term capital gain rates are 15% or less and unrecaptured Sec. 1250 gain rates are 25% or less) may be a better deal than deferring gain until future and, quite possibly paying rates that are significantly higher.

I agree, Steve. I prefer to do deals with IRAs or entities owned by IRAs so that the money is not taxed. My belief is taxes go up, not down, and the rules become more restrictive over time.

One thing I do see is that people buy investment property and exchange up over time. They convert the investement property to personal use and take advantage of the capital gain exclusion when they sell.

one issue is that taking the gain today requires cash to pay the taxman. deferring the gain may not make absolute sense, but it may make cashflow sense.

make sense?

Valid point and I suspect that some people are doing 1031 for relatively small gain when it might be best to pay taxes. This is esepcially true if your time horizon is relative short (i.e. you think you might convert that asset to cash).

However, some people probably are in my shoes where my timeline is semi-infinite as I have plenty of other non-real estate assets to tap and thus view rreal estate holding in the future as an income produing asset. While that capital is “stuck” in that asset class, the 1031 allows me to move it around within that class within incur an immediate tax liability.

Also consider a time-value of money (say over 20 yr period), I think it better far better to pay say 30% in taxes with 2037 dollars on an appreciated asset then pay 15% in 2007 dollars; of course, you have to redeploy the assets and make an assumption about what rate of return you can earn with that post-tax capital (and the future tax rate on those gains).

So, to conclude my rambling, it would seem that if you are going to keep those dollars in real estate, then using 1031 makes sense. The one scenario that could really burn us real estate investors is if those gains are taxed in the future at a different (higher) rate than gains other type of assets (e.g. stocks, etc).


I checked out the site, but must be missing something. You are not an intermediary, correct? You product allows the investor to maximize the tax savings by providing an efficient means to analyze the deals?


I look at the site as a tax return preparation tool. After entering the exchange information in a quasi-interview format, the application fills in the blanks and produces Form 8824 which I can include with my 1040.

I suppose you could use DeferEm for “what if” analysis, though, I don’t believe that was the designer’s original intent.

It might be interesting for people to test or confirm this assumption using their own properties and a cash flow spreadsheet constructed in something like Microsoft Excel.

My first response to the above sentiment was to reply, “Yeah, good point, I think I agree…” But then I thought, well, shoot, I’m an accountant. I can quickly build a spreadsheet that tests this. So I did. And using some of numbers people have given here, it does NOT make sense to use 1031 if it means you have to pay a 30% tax on all your gain.

I.e., if you have two choices–pay 30% on all gain 30 years from now OR pay 15% tax on part of gain right now and then 30% tax on rest of gain in 30 years–it saves money to pay some of the tax now using the lower rate.

[quote author=SeattleCPA

I.e., if you have two choices–pay 30% on all gain 30 years from now OR pay 15% tax on part of gain right now and then 30% tax on rest of gain in 30 years–it saves money to pay some of the tax now using the lower rate.
was that conclusion based upon a discounted cash flow analysis? (i.e. calculate the present value and say assume an inflation (discount rate of 3%)…something for me to tinker with during my lunch hour.

Where do you get the cash to pay the taxes?

You can reinvest 15% less. There’s a cost for that. Financing 15% more incurs more interest. If you don’t finance it (pay the 15% out of pocket) you have opportunity cost that the 15% could have earned elsewhere.

Or you can just have a smaller investment the 2nd time, but there’s going to be some opportunity cost in that, too.

You can tell I’m all about cashflow.

you guys need to work out the numbers using an example set of cash flows that relevant to your situation… what you’ll find, however, is that in SOME situations, the Sec. 1031 doesn’t make sense…

Yes… and sorry I didn’t answer this before.

BTW, another area where I think such discounted cash flow analysis would produce insightful results is with the whole SD IRA thing.