The 1031 Move That Lets You Buy Before You Sell
Most investors hear "1031 exchange" and immediately think the same thing:
Avoid capital gains taxes.
And while that's true, it's also why so many investors use the strategy incorrectly.
A 1031 exchange is one of the most powerful wealth-building tools in real estate, but it should be part of a long-term portfolio strategy, not a last-minute reaction when you're getting ready to sell a property.
In this week's Office Hours, I break down the 1031 playbook most investors get wrong, including the common mistakes that force people into bad deals, how to think strategically about exchanges, and one little-known variation that could completely change how you approach acquisitions.
Here's what you'll learn:
→ How a 1031 exchange actually works and why it's a tax deferral strategy, not tax elimination
→ Why some investors are better off paying the capital gains tax and waiting for a better opportunity
→ The mistake investors make when they focus on saving taxes instead of improving their portfolio
→ How debt replacement works and why failing to understand it can create an unexpected tax bill
→ How residential investors can use a 1031 exchange to move into commercial real estate
→ The exact timelines, rules, and deadlines that can make or break an exchange
→ What a reverse 1031 exchange is and how it allows you to buy your next property before selling your current one
→ How experienced investors use 1031 exchanges, depreciation, and refinancing together to compound wealth over decades
Whether you're considering selling a rental property, looking to reposition your portfolio, or simply want to understand how sophisticated investors continue scaling without triggering massive tax bills, this episode will give you a framework for thinking about 1031 exchanges the right way.
Get commercial real estate coaching, courses, and community to jumpstart your investment journey over at CRE Central: www.crecentral.com
Key Takeaways:
1031 is a tool, not an auto-default
Only use it when the replacement deal is clearly better than what you’re selling.
It’s tax deferral, not tax elimination
You defer capital gains; they can be wiped at death via step-up in basis.
Don’t force bad deals to save tax
If the gain is small or the new deal is mediocre, it’s often smarter to pay the tax and wait.
Must replace debt + equity
To fully defer: buy equal or larger value and replace both the loan amount and the cash equity.
Timelines are rigid
45 days to identify, 180 days total from sale to close; same taxpayer/entity must sell and buy.
You can move resi → CRE via 1031
Residential portfolios can be exchanged into fewer, better commercial assets (often NNN, longer leases).
Reverse 1031 = buy before you sell
Lets you lock up a great deal first, but adds fees and timeline risk.
About Your Host:
Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate broker and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving commercial real estate investors.
Episode Transcript:
Tyler Cauble 0:01
Most people who do a 1031 exchange probably shouldn't have, not because it's a bad tool, it's actually one of the most powerful tools in real estate, but because they did it reflexively, not strategically. So today I'm going to show you when to use a 1031 exchange, when to walk away from it, and one version of it that almost nobody really talks about, that could be really powerful the next time you are in the market. If you're thinking about selling anything in your portfolio this year, watch this episode first. All of that and more on today's episode of Office Hours, you This episode of the Commercial Real Estate Investor Podcast is brought to you by my CRE Accelerator Mastermind, where you'll get access to my step-by-step investment blueprint, essentially a library of resources on how to invest in commercial real estate. You'll get connected to a supportive community of other commercial real estate investors that are doing projects just like you, you'll get personalized coaching and feedback from me every step of the way. Go to www dot cre central.com to learn more. Welcome back to the Commercial Real Estate Investor Podcast. I'm your host, Tyler Cobble, here in the Cobble Group Studios in Nashville, Tennessee. Looking forward to diving into 1031 exchanges with you guys today, like I said, most people utilize the 1031 exchange as a reflex, not as a part of a strategy. It's more of a hey, we need to sell this property, or we should sell this property. Maybe you've got some trapped equity, maybe you know that you are tired of dealing with residential and you want to get into commercial. It's a great way to not pay capital gains tax, but you need to be strategic about it. You can plan this in advance. You can be far more strategic about your approach with 1030 ones, which will make them far more effective. And honestly, not everybody should be doing a 1031 exchange. There are instances where it probably just makes more sense for you to pay the capital gains tax, and move on. So, that being said, let's dive into the 1031 playbook that most investors get wrong. Now, of course, as always, when we start talking about financials, I'm not a CPA, I'm not your CPA, I don't play a CPA on this podcast. Go consult a qualified intermediary and a CPA before you execute an exchange. All right, so here's how most investors think about the 1031 Right, you're contemplating a sale, maybe you're wondering if a 1031 makes sense for you before you pull the trigger. Maybe you're currently in a 1031 I talk to investors all the time that are already - they've already sold their first property. They call me and they say, Tyler, I want you to help us identify our next property. I'm like, well, that would have been nice to know 90 days ago. So, if you're going through that, start working on identifying the replacement property well before you're within that 45 day clock, because as soon as you sell that property, you have 45 days to identify your next one. All right, or maybe you've done one before, right? You're not sure if you used it right. Maybe you end up messing up on it. You had to pay your cap gains tax. Maybe you feel like you left something on the table. You had to rush a little bit again. We want to make sure that you're not approaching the 1031 from a reflexive reactive positioning. Right, I'm selling this property now. I just have to do this to make it happen, because sometimes again it may just make more sense for you to pay the capital gains tax, which I know is kind of weird, but until my CPA told me that one time we were going through it, I didn't believe her.
Tyler Cauble 3:31
Here's the thing, though, if you are actively buying a lot of commercial properties, you get what's called depreciation, especially if you're doing cost segregation studies, and so there are times, depending on what your actual, you know, your tax strategy looks like, it may make sense for you to just cash out, because you have enough depreciation to offset the capital gains, so you might as well just get the cash, and then you can wait to go find the right deal for you, but here's how a 1031 works, high level, all right. You sell the relinquished property, that's the property that you currently own, that you're going to sell. You call that the relinquished property, all right. Those proceeds are held by an intermediary. There are qualified intermediaries, QIs, that are out there that will hold those funds for you. You cannot touch the cash in a 1031 exchange. Otherwise, it immediately becomes taxable because it's not being held by the qualified intermediary. You are never allowed to actually touch the proceeds from the sale if you're executing a 1031 exchange. You then buy the replacement property, and the capital gains are postponed, right? They're not completely wiped away, they are deferred the way that a 1031 exchange works. You are essentially kicking the can down the road, right? So you'll have to hold it until your death, right? At that point, the gain is permanently erased, right? Your heirs get a step up basis in the property, all right. And so that gain. Disappears completely. Now, there are ways to actually get out of this. At least, there used to be. They're not really as prevalent anymore. Used to be able to look at an opportunity zone fund as a way to step away from capital gains tax altogether. But at the end of the day, just sell the property, 1031 buy something new. All right, so to be clear, this is not avoidance of any and all capital gains taxes. It is strictly a deferral. You're just kicking the can down the road. Now you can chain this indefinitely. You can keep it going if done right over decades. You may never have to pay any capital gains tax on any of your real estate appreciation, which you can imagine, like we've worked with some clients over the years that have been doing 1031 exchanges for decades, and their capital gains tax is, I mean, we're talking multiple seven, sometimes even eight figures in potential capital gains tax that they would pay because they started off with one investment of $100,000 or whatever it was, and over decades it's compounded into millions of dollars of equity, right. So you start running 20% cap gains tax on that, it really starts to add up. Now, here's what not to do in a 1031 right. And this is where people start to make mistakes, they think that whenever they're selling a property that they have to do a 1031 and that's not 100% true. I mean, obviously everybody knows you don't have to do a 1031 exchange, but there's this mentality in real estate that I see amongst real estate investors that the only way I'm going to sell something is if I'm going to 1031 exchange it. Well, that's not always the best thing to do. What if the replacement deal isn't good, right? The replacement deal isn't as good as what you're leaving, right? Don't do that just to defer tax. You'll go into a worse asset, that's a bad trade, that's a bad investment. You're not really avoiding tax, you're going to still be paying it technically through a bad investment, a suboptimal deal, right? So don't force yourself to do a 1031 exchange into a potentially bad deal just because you want to save the capital gains tax. It's oftentimes not worth it. You want to make sure that if you are replacing a deal that it is substantially better than whatever you're selling, right? Maybe you want to reposition your portfolio fundamentally. You know, I typically see this a lot of times with residential real estate investors that are wanting to get into commercial real estate. Those are like kind, you are able to sell residential and buy commercial, like kind, just means real estate for real estate, right? Currency for currency, you know, gold for silver, right?
Tyler Cauble 7:49
You can't sell gold and then buy real estate, you can't sell stocks and buy real estate, those are not like kind exchanges. I mean, you can, you're just going to pay the capital gains tax on it, you can't do a 1031 exchange, sometimes the right move is just to pay the tax, right, and you know, clean the slate and redeploy it freely, not put yourself under a timeline, not put yourself under any pressure. There is something nice to be said about having the cash, and also maybe the gain is relatively small to the complexity of the deal, right? If you're doing a 1031 exchange on a $50,000 gain, where you're paying 20% in capital gains taxes, that's $10,000 that's not worth going through the headache of it. You're paying QI fees, you've got the timeline pressure, you've got to make sure you're getting into a good deal. I would just run the math and make sure that it's worth it. If I was in that position, I'd rather just pay the $10,000 in taxes. I'm probably going to have that wiped out through my depreciation anyway, and not worry about it, take my time finding the next deal, and then move on. Like, the 1031 exchange is a phenomenal tool, but it's not the end all be all of everything in commercial real estate, or real estate in general. All right, so I mean, here's the thing, I've known some very smart investors that have just decided or elected not to do a 1031 exchange whenever they sell a property, because the timing wasn't right, they couldn't find the right deal, they didn't want to force anything, and that's the right way to do it, all right now. now one of the things that I have noticed in my many years of working with investors that are going through 1031 exchanges is that they don't think about the debt when you sell a property. When you do a 1031 exchange, you must replace both the equity and the debt from the relinquished property, or the IRS will still tax the difference. So, here's an example. If you have a sale price for a property of $1 million you're paying off a mortgage of 600 grand, your net proceeds are 400 grand. Obviously, we're using round numbers here, guys. You are required to replace the $600,000 In debt that you paid off, as well as the $400,000 in net proceeds, so you need to go buy at least a $1 million property or greater. All right, that doesn't mean that you can only put $600,000 of debt on the property, you can put more, you just have to replace the minimum. You can also put more of your cash in, so right here you've got to replace essentially a million dollars, but if you have another million dollars in cash, or you have another $400,000 in cash, and you want to bring on more debt to the property, you are able to go and do that, but you have a minimum from those sale proceeds that has to be replaced, so that's the $600,000 mortgage and the $400,000 in net proceeds, so don't get surprised when you're going through this. Your qualified intermediary will walk you through all of this. Also, very important that you find a very highly recommended qualified intermediary. There have been horror stories of QIs that have taken money and disappeared into the night, so make sure you know who you are jumping into bed with, all right now. Here's what a lot of investors don't know that are transitioning out of residential. We mentioned this a little bit earlier, but you can sell your residential real estate and exchange it for commercial. It doesn't matter if it's a single family home for an office building, or a condo for, you know, a strip center. You are able to do it. That is the beauty. White kind just means real property for real property. All right, so you can, you know, if you've got 12 single family homes, you've got 12 sets of tenants, 12 maintenance calls, inconsistent cash flow, all the weekend headaches, you can sell that entire portfolio and 1031 exchange that into one commercial building, or two, or three, depending on what you want to do.
Tyler Cauble 11:49
You could get one to three tenants on longer leases; they could all be triple net, so you don't have to worry about the increase in property taxes, the increase in insurance that tenants pay their prorated share of that, you'll get stronger cash flow, and you get your weekends back. Is the nice thing about working in commercial is it is treated like a business. They are typically nine to five, depending on the type of business it is. Sometimes it's 10 to 710, to 810, to nine, whatever. I've helped many investors make this move. It is pretty incredible to see when an investor who has been building up this residential portfolio for years and has gotten to 12, or if you guys saw my video with Ray Smith a couple weeks ago, you know he had over 100 I think close to 120 single family homes, he sold most of them off and exchanged them into commercial buildings, and just seeing the transformation that can happen, not just for cash flow, like, yes, you can make more cash, but if you've got 100 homes, you're probably doing pretty well. But the lifestyle, right, that's the biggest thing, is that you're not constantly dealing with all of these problems. There are a lot of rules that you have to follow when you are going through a 1031 exchange, and it's good that you study this and know them before you get into a situation where you're doing a 1031 all right, because you, it's very easy to get intimidated by the timelines or by the process if you don't understand it, but also at the end of the day it's a fairly easy, it's a, it's pretty easy, it's an easy process to follow, right, or maybe it's simple, it's not easy, but you have to have a QI. Go find a QI before you close on the property. You cannot touch those funds, so they have to go into an escrow account with that qualified intermediary. Once you close, you have 45 days to identify replacement properties, right? The QI will submit all of this paperwork for you, but it has to all be done in writing. All right, there is a three property rule, you may identify up to three properties, regardless of the value. That's what most people do. They will do the three property rule, go out and find one, two, or three properties that they're going to identify. You also have the 200% rule. You can identify any number of properties up to 200% of the relinquished property's value, that's basically, you know, how you can go identify 1000 tiny homes if you want, as long as it's not worth more than double the value of the property that you're selling. That starts to get a little confusing and messy, and you know that's why most investors just pick one, two, or three properties. All right, from there you have 180 days total, that is including from the day that you sell your property, 180 days total to close on the replacement property, that is a hard deadline from the closing. All right, so that 45 days sits inside this window, it is not a 45 days to identify and then 180 days to close, it is 45 days to identify it, which is included in the total 180 days to close. All right, here's the other thing, the same seller must be the buyer, and you'd think that that would make sense, right? Or you're maybe you're sitting there going, well, yeah, obviously, okay, but if you and. Partner are partners in this LLC, that LLC, both of you have to decide to move forward and do the 1031 exchange. You cannot buy your partner out after the sale of the property, and then you execute the 1031 exchange. It has to be exactly the same entity, the same person, the same people, partners, whatever it is, if you sell a property that's in your personal name, you have to buy the property in your personal name. If you sell a property in an LLC with a partner, you can't then 1031 into your personal name, it must be the exact same entity. All right, now there's also a version of this where you buy the property before you sell, and a lot of investors do not know that this exists. Pretty phenomenal tool called the reverse 1031 exchange.
Tyler Cauble 15:51
All right, those, so the standard 1031 you find your next deal, you sell your current property, and then you roll your proceeds into the replacement, right? So you might find a deal, but you've really got to sell yours first. You need those proceeds, then you go out and identify the way that a reverse 1031 works is you find your next deal, an exchange accommodation title holder takes possession, which could also be a qualified intermediary, but they take title of your property, and then you go and sell your current property, so you are actually going out, you're buying the replacement property first, and then you're reversing the 1031 and going and selling one of your properties to then basically fund that 1031 right, so So it allows you like to move quickly on a property if you know, like, hey, this is a great deal. I've got to buy this right now. I need to get this before anybody else does. The problem is it's still just like a 1031 with regards to the deadlines, the timelines, the squeeze that you get on the front end. You still have 180 days from the day of closing on the new property to sell your other property, all right. You still have the same hard deadline. Now, you can pay a little bit more in fees, typically five to $10,000 more, in my experience, but it completely depends on the complexity of the deal. All right, and so you know, hey, many investors will pass on pretty great deals because they assume that they don't, that they have to sell a property first. You don't have to, you can actually go through the process of buying the new property, the quote unquote replacement property, and then selling your asset. You just have to make sure that you can absolutely sell that asset in order to do a proper 1031 exchange, so here's a few questions to ask yourself before you decide, does this actually make sense for me to do. Number one, is there a replacement deal that I'd buy with the clean capital? If yes, then a 1031 makes sense. If no, then just pay the tax and wait for the right deal. Number two, does my replacement plan require lighter financing than what I'm selling? If yes, run the boot calculation first, figure out how much that you'll have to be pulling out of the deal and paying capital gains taxes on. If no, the debt replacement is recovered, go ahead and proceed. All right. And then number 3am, I doing this reflexively or am I doing this strategically? If you're doing it reflexively, stop and think it through, right? Call people that have gone through this before, speak with your qualified intermediary, talk to your CPA, talk to your attorney. Make sure that you are being strategic about every move that you make. Treat your real estate investments like a business. You're not just going to run out and decide to start selling a new product tomorrow or a new service tomorrow without testing the market, having conversations with advisors, and making sure that you're approaching it right. If you are thinking about it strategically already, good, move forward. That's the best thing you could be doing. I don't make any decisions inside my portfolio anymore, based on a knee-jerk reaction, I have conversations with all of my professionals first to make sure that I'm thoroughly thinking through everything, right, and it's pretty great. I mean, I love having those conversations with my CPA, with my CFO, because there are times when it makes sense for us to sell this year, or it makes sense for us to do a cost segregation next year, or there's any number of different things that we could start contemplating within our portfolio that you know, hey, actually we're buying a couple of properties this year that we'll get, you know, depreciation on, let's just sell this property, not do a 1031 exchange, cash out, so that we can have that cash ready. We'll be able to offset the gains with our depreciation and move on, right. We don't need to worry about the stress of a 1031 So, here's how this compounds over time, right. We've been talking about these financial pillars for the past few weeks. So, deal number one, you sell your 1031 that's year zero, right?
Tyler Cauble 20:03
Let's say in deal number two, you roll it forward year eight, right. We tend to recommend that you hold your properties for five to seven years, then sell, do a 1031 exchange again. Reason being is you are maximizing your tax benefits in that five to seven year period. It also tends to line up with when your commercial loan is coming due, and it's also pretty much the time when you can absolutely maximize your actual inputs into the deal. That's when you'll raise the rents the most, that's when you'll optimize the property the most. After that, yeah, of course, you can get some pretty phenomenal appreciation as the market moves on, but in terms of what you can actually control, typically within the first five to seven years, you've juiced it all right, deal three year 18 roll again, and then you're 40 plus, you die, and your basis resets, and man, lucky for your heirs, you have built a legacy, all right, they get a step up basis, they get to permanently defer any capital gains taxes, because they are completely gone, right? Thanks to that step of basis. All right, depreciation and cost segregation are paper losses that you were able to compound along the way. They are going to help you as you're going through all of this. You can also do a cash out refinance. There are many ways for you to leverage the equity that you build up in this portfolio without necessarily having to trigger any tax, taxable events, so to speak. All right, so the 1031 alone is powerful, but again, we've talked about depreciation, we've talked about cost segregation, we'll talk about cash out refis as well at some point on this show. They're all incredibly powerful tools that every investor should be taking advantage of. I mean, I did that this past year. I went and refinanced two of my properties, pulled out some cash to put into a third. I didn't have to make any more money. Those properties just made. I mean, the equity, equity was sitting there. I went and pulled it out, and I was able to get a third deal because of it. So that's how this really starts to compound. I mean, that's the, that's the beauty of building up a portfolio and working on it over time, is that at some point it snowballs to the point to where you don't necessarily have to make any more money, your properties are making all of the income, the equity, the appreciation for you on your behalf, with or without your constant involvement. That way your portfolio becomes a self-fulfilling prophecy. It starts building itself. So, the 1031 is one of the most powerful deferral tools, it is the most powerful deferral tool in all of real estate, but the biggest thing that I want you guys to walk away with today is to not use it reflexively, don't use it reactively, be strategic, plan it out, have those conversations before you ever list your property to make sure you are thoroughly thinking through the process the right way, because at the end of the day, I know it sounds weird, but it might make more sense. You might be in a taxable situation where it makes more sense for you to not do a 1031 than it does to do a 1031 All right, next week we'll tease next week's office hours. Why the best commercial deals never hit the market, and how investors finding them are doing it. Off-market deals are one of the most powerful, powerful opportunities for many new investors in commercial real estate, and so we want to talk about that next week, because y'all asked me about them all the time, and I love me some good, love me some good off-market deals. Colin, what's going on, man? He's saying, 'Good morning. As a CPA, I enjoy everyone's excitement around taxes. Yeah, everybody gets super excited about them, and not paying them, that actually is pretty exciting. Cvcv is saying, "Hey, I seen building 4400 square foot shop, 150 USD, three bays, 20 by 30 shed two, awesome man, sounds like a good deal. Not really sure what, what the question was there, really the statement, to be fair. Gone is saying, could also look into doing a reverse 1031 to control the timing a bit better. Nice man.
Tyler Cauble 24:25
Well, that comment came in right before we dove into the reverse 1031 so that was that was perfect timing. That was perfect timing. Guys, take advantage of the 1031 It's, it's a great, it's a great tool, but make sure that you're doing it the right way, make sure that you are being strategic about it. Thank you, guys, for joining me this morning on this week's office hours, diving into the 1031 playbook that most investors get wrong. Hopefully, you guys are enjoying this and enjoying the new format that we have for office hours. If you have any comments, you have any topics. You have anything that you guys are going through that you would like for me to talk about, to dive into, to dissect on office hours? Let us know again next week. We're talking about off-market deals, how to go out and how to find them. Thank you, guys, for joining us. We'll see you in the next one. This episode of the Commercial Real Estate Investor Podcast is brought to you by my CRE Accelerator Mastermind, where you'll get access to my step-by-step investment blueprint, essentially a library of resources on how to invest in commercial real estate. You'll get connected to a supportive community of other commercial real estate investors that are doing projects just like you. You'll get personalized coaching and feedback from me every step of the way. Go to www.crecentral.com to learn more.