If you walk through your local bookstore’s business section, you’ll see a dizzying cornucopia of books dishing financial advice.  Many of them extoll the virtures of saving for retirement, maxing out the 401k, walking past the Starbucks, instead of into it, downsizing the house, cutting up credit cards, lowering your tax bill, etc.  You see the same faces on TV, on the web, radio, and in print everywhere.  However, I already max out the 401k, live frugally, save prudently, and have no debt other than the mortgage.  As I get into more sophisticated financial transactions, listening to cookie cutter advice designed for the masses, I realize, is not necessarily in my best interests. 

 This moment of truth came to light when I was talking to a friend about real estate investing.  A relative had made a substantial profit in the sale of a commercial property and paid 15% long term capital gain tax on the profit.  My friend said that he should have waited to sell until he could find a comparable property for a 1031 exchange.  I said, why not just sell, and report the gain.  After all, the long term capital gain tax is only 15%.  It’s better to book the gain now at the low tax rate, rather than waiting to find another deal, that may not be as desirable, and put off a gain that may be taxed at a higher rate in the future.  Moreover, with the real estate marke on wobbly legs now, the same buyer may not be around in the future.

 My friend insisted that the 1031 exchange was the way to go because of the tax savings, quoting several recent financial books that he had read about this tax savings strategy.  But I couldn’t help thinking that he was missing the larger picture here.  In my view, taking the profit is better (less 15%) than finding a deal just to do the exchange.  I have worked at length with this relative on other real estate deals, and usually it is sifting through many rocks to find that diamond.  My friend is so focused on the “tax savings” that he is missing the dynamics of profit, loss, and making money.  No one likes to pay taxes, but if it is necessary to unlock a nice large gain that can be spread out among other properties as down payments, especially at a tax rate of 15%, I’ll take that any day.  Sure enough, the relative deployed the capital into several other deals, magnifying his leverage and profits!