Post-Tax Season Strategy for Real Estate Investors: Hold, Sell, or 1031 Exchange
Originally published on April 28, 2026
“I don’t want tax to drive big decisions, but I want it to be that little sidecar you’re paying attention to.” — Kyle Paxton, CPA
In this episode of the Real Estate Industry Update, Daniel Roccanti and Kyle Paxton walk through why the post-tax season window is one of the best planning periods of the year for real estate investors. With tax returns finished and current Q1 data in hand, investors have the full picture they need to make smart decisions about whether to hold, sell, or pursue a 1031 exchange.
Daniel and Kyle work through a detailed 18-unit multifamily example to show how investors can evaluate true economic performance, spot common red flags, and accurately model the tax implications of a sale. They also break down the mechanics and trade-offs of 1031 exchanges, including the timeline pressure, basis reduction, and disqualifying factors that can complicate execution.
Resources
Full Transcript
[00:02] Daniel Roccanti: Welcome to the Real Estate Industry Update. I’m your host, Daniel Roccanti, here with Kyle Paxton for another great video. Today, we’re going to talk about something now that tax season is over. The rush is over. Most people have finished their tax returns or at least filed an extension, and we’re going to push that off until another six months until we worry about that.
[00:26] Daniel Roccanti: But this is actually a great time for most investors to be like, all right, taxes are done. We actually have a lot of relevant information now that taxes are done. And now that the summer’s coming up, let’s use this time to really sit down and think through our investments. Is the real estate that I’m holding, are they still good investments? Should I be holding onto them? Should I be considering selling them? Should I be considering a 1031 exchange? There’s a lot that you can consider here, and this is one of the best times of the year to start doing that.
[00:57] Kyle Paxton: Totally agree, Daniel. I love this time of year because, to your point, on paper, the tax return is just compliance based, right? We check the box, we filed it, investors get their K-1s, we move on. But it’s a really good time to hit that pause and say, all right, how are we doing with our portfolio? What should we be doing differently? And do we need to make some big transaction moves in this year while we still have some time? We’re in April at the time of filming this. Plenty of time to get stuff done before the end of the year.
[01:23] Kyle Paxton: The other piece of this is, in some instances, if you have pieces of your portfolio that are underperforming, the pain’s fresh. I know I’m more motivated when there’s pain. And so if you’re feeling that pain, if investors are feeling that pain, this is a good time to take a step back and just kind of reset and figure out where we go from here. That’s really what I want to focus on is taking this time.
[01:52] Kyle Paxton: If you have just completed tax returns, if you just had extension calculations done for you, and there’s numbers on a paper that you can really look at where we ended 2025 at, use that with the current data on Q1 2026, and use the full picture there to make educated decisions on what we want to do with our portfolio.
[02:14] Daniel Roccanti: Yeah. Now the tax returns are done. A lot of people just see, all right, this is backwards-looking compliance, but this is actually really good data and one of the better planning windows of the year. A lot of people know end of tax year is a great planning time, and that is.
[02:32] Daniel Roccanti: But right now is one of the better times because tax returns are done. I still have majority of the year left. So now let’s go back and analyze all our properties, all our investments. The high level question that you want to just ask yourself before you even get into the details is, would I buy this property today? Would I still choose it? If I had any choice, I had the cash, I didn’t have the properties, would I still buy this property today, or would I deploy my equity into something else and choose a different asset?
[03:07] Kyle Paxton: Absolutely, Daniel. And let’s pivot now into what tax season reveals about our portfolio performance. So I know you handle this the same way I do. We deliver a tax return, and then there’s a hundred million questions from investors and banks and business owners on why is there a large taxable loss on my tax return when I have strong cash flow on this property or vice versa, constantly having to explain that economic reality and that taxable income difference.
[03:34] Kyle Paxton: So clearly, in order to have a full comprehensive picture of performance, you need to understand the tax side. I say in just about every video we record, I don’t want tax to drive big decisions, but I want it to be that little sidecar you’re paying attention to. Making sure you understand the difference between taxable income, your pre-tax cash flow, after-debt cash flow, then looking at what are your capital expenditure needs, distribution needs, year-over-year expense pressure. Really taking the time to get a grasp on all of this and understand how the full picture flows is huge.
[04:08] Kyle Paxton: We’re going to get into it more in a little bit, but there are tax traps on sale, and not properly modeling those tax traps on sale can totally ruin your ROI and cause some big headaches down the road.
[04:32] Daniel Roccanti: So it is a really good time to just stop and reset on those items. Tax season can really reveal what your actual portfolio performance is. And it’s key that you understand, all right, can I read my tax returns? Step one. Do I fully understand? Some people will have financials, keep good records, keep bookkeeping.
[04:55] Daniel Roccanti: But Kyle and I have dealt with real estate long enough to know that the real estate crowd are not the best when it comes to bookkeeping. So sometimes tax returns are some of the better actual bookkeeping for them to look into. So it really is understanding what’s the difference between the true economic performance of these and how it relates to your tax return.
[05:13] Daniel Roccanti: Because as we know, taxable income is completely different than what your true profits are of these rental properties. And so when you’re looking at it, you want to basically say, all right, what am I revealing here when I look at those tax returns? When I start backing out depreciation, I start backing out everything because I’m seeing losses all over the place on tax returns.
[05:38] Daniel Roccanti: That’s good for paying less taxes, not always great when it comes to I still need cash flow and things like that. So do my assets still have strong cash flow? They can have strong cash flow and have low taxable income or no taxable income. That’s not always the big difference maker here. Or am I showing weak cash flow, or has my property significantly appreciated, but really the performance is pretty mediocre or even low? There can be a lot going on here, so you really want to look at and compare your rental properties to the tax return.
[06:11] Daniel Roccanti: If you have actual numbers, you are keeping books, that’s even great. You have another data point that you can go off of. But just kind of common red flags that we’d look at when we get through tax season. We see properties all over the board, all over the country, all different asset classes held by different managers, they all perform differently.
[06:37] Daniel Roccanti: But you can see some common red flags. One is operating costs, carrying costs, those are going up every year. Insurance, taxes, lots of rising costs. Repairs are getting more expensive. Anyone who needs to do common repairs or renovation, CapEx, these are all kind of rising up.
[07:00] Daniel Roccanti: Another one is, what about suspended losses without really a clear strategy? So let’s say I’m not a real estate professional, and I can’t get the status. I might be sitting on a bunch of suspended losses. Is that really best for me and my picture here? And what about large deductions like depreciation or just a large loss? It’s actually masking my poor performance.
[07:22] Daniel Roccanti: I look at my tax return, I go, great, I have $100,000 loss on this rental, which means I can take that against my other sources of income, so I’m paying less taxes. But when you really strip away the tax portion of it, is this really the best asset for me? Because yeah, I’m paying less taxes, but I’m also losing money on this deal. So it really is about, all right, is my cash flow getting thinner? Have the values really gone up? Is this the best source for my capital? And this is where you get dead equity a lot of times.
[07:59] Daniel Roccanti: I have this property, I have equity in it, but it’s basically dead. Not producing really any income for me. It’s just sitting there, and is that really the best use for my capital?
[08:23] Kyle Paxton: Absolutely, Daniel, and I want to pause one more second on the large depreciation deductions and masking that poor operational performance. A lot of times, I’m guilty of this, too. I have losses on real estate entities. I’m like, oh, it’s depreciation driven, and ride off into the sunset. But that’s not always the case. And then the other side of that, the large depreciation deductions, is the cash flow hit on the back end.
[08:48] Kyle Paxton: So when we’re talking about a sell analysis, making sure we understand that recapture that’s going to happen. You got a big benefit five years ago, now that tax bill’s coming due, barring you don’t implement one of our other strategies to help mitigate that. But making sure that that is in the back of your mind always through the life of the deal is very helpful in this kind of sell versus hold analysis on an ongoing basis.
[09:10] Daniel Roccanti: So what I like to do here is let’s take a little bit of a sample. I need a sample deal here so I can fully understand. So we’re going to take about 18 unit multifamily. We purchased it for about $2.4 million. It’s currently estimated to be $3.5 million. So we’ve had about a little bit over a million dollars worth of appreciation. My loan on it is $1.45 million. So I got pretty good equity in this deal. I got about $2 million worth of equity in it. My net operating income’s about $215,000 a year.
[09:55] Daniel Roccanti: There’s been depreciation. We’ve even had some accelerated depreciation because of improvements. And what we’re looking at down the road right now is, we’re probably going to have to replace the roof and the HVAC within the next two years. Those are going to be some pretty large CapEx expenditures. So as an investor, I’m trying to decide, do I keep holding this? Do I hold it for another five years? Do I sell? Is it better to sell with a 1031 exchange? Is it better just to sell, pay the taxes, and find a stronger asset here? And so what we have to do is there’s no 100 percent right answer. We really got to get to the numbers and then decide what’s the numbers telling us, and then making the best decision based on those numbers.
[10:29] Kyle Paxton: Yeah, absolutely. So let’s talk more on what those numbers look like. In talking through our capital gains and depreciation recapture on the sale, really looking at what is that hit going to be if we sell? Obviously, you have your typical closing costs and everything that would come with your sale. But then the tax piece is that sidecar we got to pay attention to.
[10:58] Kyle Paxton: So what we frequently see in these conversations is that investors regularly overestimate how much cash they’ll have after a sale, almost time and time again. Because a big chunk on your classic real estate sale, a big chunk of the capital you get on sale goes to pay off debt securing the property or secured by the property, correct? And so that piece that is paying off the debt is not cash that hits your pocket, but that is part of what factors into our sales price here.
[11:32] Kyle Paxton: That plus depreciation recapture, I have clients get burned time and time again without proper planning around this. Making sure with our analysis, we’re factoring in, all right, we got the sales price, but we’re getting all this closing costs, the debt payoff, federal and state tax. It’s the other piece that gets folks is huge.
[11:53] Kyle Paxton: That state exposure can be multi-state, depending on where your investors are, where your employees are, where the property itself is. That can be complicated and cause some unexpected heart burns. Additionally, if you have investors, you’re holding your real estate in an LLC taxed as a partnership, the partnership may have an obligation to withhold and remit tax on behalf of their partners that don’t live in a certain state. So there’s a lot of catches there.
[12:21] Kyle Paxton: I see these components overlooked quite a bit in the sales modeling, is really making sure we key in and understand what that capital gains hit, plus the depreciation recapture, and what is the cash flow that attached to that, and where does it need to go. All of that is overlooked quite frequently in some of these conversations.
[12:47] Daniel Roccanti: So some investors basically overestimate how much cash they actually think they’ll get to sell. Because they’re really looking at paper equity. I’m taking what I think my property’s worth, I’m taking how much money I still owe in debt, and the difference is what I’m going to get in cash. At high level, you’re kind of right, but you’re missing out on a lot of the additional expenses. You’re going to have closing costs, you’re going to have commissions. You’re selling the property, so you usually pay the commissions. And then depending on the type of market, you might have to give concessions and things like that.
[13:23] Daniel Roccanti: In our sample, we talked about, hey, the roof and the HVAC are going to have to get replaced in the next two years. Well, a buyer’s not going to be oblivious to that. They’re going to notice it too. So it doesn’t mean that you’re completely getting out of that. The buyer’s going to be like, oh, well, I’m going to have to buy this property and then completely put a new roof and a new HVAC on it shortly.
[13:59] Daniel Roccanti: So that means I’m either going to need some concessions, I’m going to make you do it, I’m going to drop the price, something’s going to get affected. And now that three and a half million dollars of what you thought you had in true value there might be dropped. It all depends on the market. And then taxes is one that is always missed.
[14:18] Daniel Roccanti: What do I truly have in taxes? This is where things like a 1031’s great because it gives me a chance to avoid the taxes, reinvest that property, but it comes with a lot of basically red tape things you have to do. And if you live in a state or the property is in a state, so we’re mostly located here in Florida, so we don’t think about income tax. But it’s very common for our investors to own properties in states that do have taxes, and you got to remind yourself, you got to pay those state taxes as well.
[14:44] Daniel Roccanti: And then what truly are your taxes? This is where projecting what your taxes will be, because if you did take accelerated depreciation, you’re going to have some ordinary recapture. You really need to look at that when you’re selling your property. What’s my true taxes going to be? We can’t just take a flat capital gains of 15 percent because it’s a long-term asset. Well, maybe, but reality is, you could be in the 20 percent tax bracket. What about net investment tax? I bet you didn’t think about that. That’s another 3.8 percent tax.
[15:24] Daniel Roccanti: And then all the Section 1241 recapture, which actually has to get taxed at ordinary rates. So if you’ve had cost segregations done, if you had anything like that where you’re taking accelerated depreciation, you really have to understand that taxes might actually hit harder than you think it will.
[15:48] Daniel Roccanti: And so this is why a lot of investors basically are overestimating how much cash they actually think they’ll get after it. So it’s important that you go through it, go, all right, what’s my true cash, what I think I’m going to get here after all is done? And if you go through our sample here, it’s like, hey, looks like I may get $2 million. And really at the end of the day, you might only be getting $1.5 million once we start factoring taxes and things like that. And it could be even less, especially if you’d had a lot of accelerated depreciation.
[16:24] Kyle Paxton: Yeah, absolutely. Daniel, I’m jumping around our outline here a little bit, but we’re dancing around 1031 exchange. Let’s get a little deeper into that. In looking at that sell analysis, a conversation I have in preparation for every sale we have coming up around real estate is does a 1031 like-kind exchange make sense in this context?
[16:49] Kyle Paxton: I think most people watching this video, if you’ve made it the fifteen minutes we’re in here, you probably are aware of 1031 exchanges. But at a high level, we’re relinquishing property for a property that’s deemed like-kind. There’s a pretty loose definition in real estate of what like-kind means. Generally, you can replace real estate with real estate. In order for a full gain deferral, you would want the replacement property to be of equal or greater value.
[17:07] Kyle Paxton: You’re replacing your equity and the debt that you’ve relinquished in the new property. And ultimately, you don’t touch any cash. No boot comes your way to get a full gain deferral. A big advantage of the 1031 exchange is in this 100 percent bonus depreciation environment where we have cost segregations running left, right, and center, is that to what Daniel just spoke about, that ordinary recapture on the depreciation component can be included in this gain deferral in a 1031 exchange. That is gold in this season of real estate investing from a tax perspective, and it’s a huge consideration.
[17:39] Kyle Paxton: That is one of the biggest benefits of 1031 exchange. But ultimately, it comes back to if you don’t need the cash right now, and you want to exit a particular deal for whatever reason, you’re able to find a buyer, and then within the kind of fairly strict 180 day window to replace it, you execute a replacement on that property. You can defer your gains. You can preserve your investable equity there. You can now start parlaying this and start building towards larger acquisitions.
[18:14] Kyle Paxton: And then it helps you just kind of keep stacking that untaxed gain. There’s estate planning components around this too. We’re getting a little bit out of the scope of the conversation, but there are a lot of benefits to 1031 exchanges if your liquidity is right, and you don’t need the cash on exit from a particular investment.
[18:41] Daniel Roccanti: Yeah. 1031s are one of the most powerful things in the whole real estate strategy. When you’re thinking of real estate and taxes, you always think about 1031 exchanges. If you look at solely the numbers of a 1031 exchange, it’s almost always going to be beneficial. Your ROI is always higher when you do a 1031 exchange. But you’ve got to step back and be like, all right, I can’t just look at the numbers. Because if I only look at the numbers, I’m going to win. I’m going to want to do it. I’m going to always want to do it, because I’m able to buy bigger properties.
[19:32] Daniel Roccanti: And I’m able to reinvest money basically that I would’ve had to pay taxes on, which means I’m putting more of my money back in it. But there’s just a lot of red tape around doing a 1031 exchange. And so while it makes sense, the benefits do, if everything goes well, we have to really think, okay, can I actually do a 1031 exchange? Do I understand the timelines? Do I understand that these timelines are going to make replacement property pressure?
[20:10] Daniel Roccanti: And you could actually buy a weaker deal because of it, because of these pressures. So you basically have 45 days to go out there and find new property, identify a property, and then you have 180 days to close it once you sell it. Now, beyond this conversation, but you have options like reverse 1031 exchanges to kind of get around that. But those are complex deals, and you’re really not going to do that unless you’re having a really big real estate property, just because of how complex it is and the cost and the risk that goes with it.
[20:54] Daniel Roccanti: But you really got to understand here, the 1031 is always going to make more sense when I just look at the numbers. But I got to think to myself, realistically, am I going to be able to identify a new property? If I’m thinking about doing a 1031, then I need to think about it before I sell my property, and you start looking to identify it. You can buy multiple properties. You can do whatever you have to do, but you really have to buy a property that’s of more value than the one.
[21:13] Daniel Roccanti: So in my multifamily deal, I have $3.5 million worth of value of that property. I have to go there and buy $3.5 million or more. But this is a really great way to step up. I’ve seen a lot of people do this, where they buy a single family home because they’re the easiest to get into when you’re first in real estate, and then you want to upgrade, and you 1031 exchange into a quadruplex, then you 1031 exchange it again into a 16-plex, and you just keep going.
[21:45] Kyle Paxton: Yeah, or into some commercial real estate.
[21:48] Daniel Roccanti: It’s just a really easy way. But we really got to understand the trade-offs here. If I’m doing a 1031 exchange, I’m stuck reinvesting all my money into the new deal. I have timelines that come up pretty quickly, so I got to truly make sure I understand. And then truly also make sure that you can do the 1031 exchange. Talk to a qualified intermediary. Talk to your CPA. Make sure that there’s nothing in here that would be preventing it. A lot of people don’t realize personal use on the properties can prevent 1031 exchanges a lot of times.
[22:32] Daniel Roccanti: But the benefits from the numbers are always going to be on your side. And so I’ve seen many deals where by selling the property, normal sale, recognizing the taxes is a terrible deal. Doing a 1031 makes it a good deal. So you got to really decide, all right, do I want to go the 1031 route, knowing that I might not be able to find that true perfect replacement property. I might have to settle. And then that doesn’t make my deal as good as I was hoping.
[23:03] Kyle Paxton: One more point I really want to drive home here, because this has a material impact on our modeling, is that when you do a 1031 exchange, your basis in the replacement property is reduced by the gain you deferred on the property you relinquished. So we’re constantly in that bonus depreciation or cost segregation, bonus depreciation mindset.
[23:30] Kyle Paxton: We get a big write-off on whatever percentage of the purchase property. You have to remember that that deferred gain reduces your basis in the replacement property. That depreciation number is going to be smaller, and it’s going to be only on the excess that we’re putting in in the form of equity or additional debt. I see that catching people a lot too. So there is, it’s not without faults. There are some catches, but a great tool certainly for our real estate investors as we consider whether to sell and how.
[23:53] Daniel Roccanti: Let’s kind of just do a little summary here. Basically, tax season’s over with. Let’s sit down, and let’s actually look at all our assets. We got tax returns. We got pretty good data, whether we got financials or just using tax returns, to really evaluate how well each of our assets are performing.
[24:24] Daniel Roccanti: High level, let’s ask ourselves, if I didn’t have this asset, would I still buy it today? Don’t look at historical performances. I’ve seen many assets that perform historically well. Are they performing today, in today’s current environment? And if I have to refinance, which might be coming up soon, is it still a good deal? You want to make sure you’re taking all your cases of, all right, what if it goes upside down? What if I got to refinance tomorrow, and now I can’t service my debt payment anymore?
[24:53] Daniel Roccanti: What does rent look like? Is my rent growing? Is it flattened? Is it market-based or is it property-based? Right now, rents are really flat just around the country, but what about my specific asset? Is there anything I can do? Is there a large CapEx coming down the road? Is there any room for me to do anything in my property to really add value and grow, or have I kind of just done the best that I can here? If I’m not ready for that, maybe an exit is what I’m looking for, and it’s time to find that next deal.
[25:26] Daniel Roccanti: And then we can start looking at our options, and does it make more sense? Is your rate of return going to be better holding the property or selling it and finding a better property? Thanks for stopping by here with Kyle and I, and we’ll see you next time.
[25:49] Daniel Roccanti: To learn more about James Moore and Company’s real estate accounting and business solutions, go to jmco.com. And don’t forget to subscribe to our Real Estate Industry Update series to receive updates when new videos are released. If you’d like to be a guest or if there’s a topic you’d like to see covered on a future episode, contact us through our website or email us at info@jmco.com. You can also follow us on social media for more news.
Watch the Full Episode
For Daniel and Kyle’s complete walkthrough of the 18-unit multifamily example, the hidden tax traps that erode sale proceeds, and the full 1031 exchange discussion, watch the episode above. Subscribe to the Real Estate Industry Update for new episodes covering tax planning, market trends, and investment strategy for real estate investors.
All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.
