At some point, every rental property owner asks the same quiet question: is this property still working for me, or am I working for it? If you own investment real estate in the Phoenix metro area and are wondering who should consider a 1031 exchange, the real issue may not be taxes alone. It may be performance and potential costs at sale.
A 1031 exchange is not just for large investors. It is a strategic tool for property owners who want clarity about how their income property is actually performing and what could happen financially if they sell.
I am Shirley Coomer, a licensed Arizona real estate agent with Keller Williams Realty, serving the Phoenix metro area since 2005. I work with property owners across Phoenix, Chandler, Mesa, and surrounding East Valley communities who are evaluating whether to hold, sell, or reposition investment property. Many believe they understand their numbers. Few have completed a structured asset performance test that includes looking at capital gains and depreciation recapture exposure.
If you are a rental owner considering selling or repositioning property, this article is for you.
A 1031 Exchange Is About Strategy, Not Just Tax Deferral
Most landlords first hear about a 1031 exchange in the context of deferring capital gains tax. That is only part of the story.
When you sell an investment property, you may face:
- Capital gains tax on appreciation
- Depreciation recapture tax on the depreciation you claimed over the years
- State tax considerations
Depreciation recapture surprises many owners. If you have taken depreciation deductions on your rental, the IRS may require you to recapture a portion of that at sale, which can increase the tax bill.
A properly structured 1031 exchange allows you to defer both capital gains and depreciation recapture by reinvesting proceeds into another like-kind property, following strict timelines and rules. This must be coordinated with your qualified intermediary and tax professional.
The key question remains.
Should you exchange at all?
The right decision depends on measurable performance, equity position, income reliability, management burden, and how the property fits into your retirement and estate planning. A 1031 exchange is a tool. It is not automatically the right move.
Who Should Consider a 1031 Exchange in Phoenix?
Not every landlord needs one. But certain profiles consistently benefit from exploring the option.
You may want to consider a 1031 exchange if:
- Your rental has significant equity, and selling outright would trigger capital gains and depreciation recapture.
- Your return on equity is low when you calculate true net income compared to the capital tied up.
- You are tired of active management, especially with Arizona roof wear and HVAC exposure in extreme heat.
- You inherited property and do not want to manage from another state.
- You are approaching retirement and want to simplify income streams.
- Your property no longer fits your estate or long-term financial plan.
In my experience working with Phoenix-area landlords, many focus on the fact that rent exceeds the mortgage payment. That alone does not define performance.
Just because you have positive cash flow does not mean the rental is performing at an acceptable level.
If a property is worth $600,000, with $200,000 owed, you have $400,000 in equity. If your true annual net income after all expenses is $12,000, your return on equity is 3 percent. When owners see that number clearly calculated, many realize their actual return on investment is lower than they assumed.
That is data. And data drives better decisions.
Have You Actually Run an Asset Performance Test?
This is where clarity begins.
An asset performance test evaluates:
- Current market value
- Outstanding loan balance
- Gross rental income
- Operating expenses
- Capital expenses such as roof or HVAC replacement
- Vacancy allowance
- True net income
- Return on equity
- Estimated capital gains exposure
- Estimated depreciation recapture exposure
Most landlords know the rent amount. Fewer understand how depreciation recapture could impact their net proceeds if they sell without a 1031 exchange.
In Phoenix and the East Valley, I have reviewed properties in neighborhoods like Ahwatukee and Tempe where the owner assumed a certain net outcome. After modeling estimated sale costs, capital gains, and depreciation recapture, the projected net proceeds were very different from what they expected.
An asset performance test separates assumptions from measurable financial reality.
I provide this analysis for clients so they can make decisions from information, not emotion. Sometimes the numbers confirm holding makes sense. Other times, they reveal opportunity cost or unnecessary tax exposure.
Many Rental Owners Focus on Cash Flow, Not Total Exposure at Sale
This is common across the Phoenix metro area.
A landlord purchased a property years ago. The loan balance is low. The rent has increased. The property feels stable.
But when we account for:
- Roof aging under desert conditions
- HVAC replacement risk
- Insurance and tax increases
- Vacancy cycles
- Management time
- Capital gains tax
- Depreciation recapture
The overall picture can change.
Positive cash flow measures income. It does not measure return on equity, nor does it reflect the potential tax impact if you sell.
A 1031 exchange can defer both capital gains and depreciation recapture. Whether that makes sense depends on your broader goals and risk tolerance, and should be reviewed with your tax professional.
A 1031 Exchange Can Reposition Capital Without Immediate Tax Recognition
If your return on investment is lower than your goals, and a direct sale would trigger significant tax exposure, a 1031 exchange may allow you to reposition equity without immediate recognition of capital gains and depreciation recapture.
That could mean:
- Moving from one high-equity property to multiple income-focused properties
- Consolidating several properties into one simpler asset
- Transitioning to a property type aligned with retirement goals
- Adjusting geographic focus within Arizona
The structure depends on your situation and must be coordinated with qualified professionals. My role as a licensed Arizona real estate agent is to guide valuation, pricing strategy, buyer positioning, and replacement property identification within the required timelines.
If You Are Nearing Retirement, This Conversation Is Critical
Who should consider a 1031 exchange most seriously?
Rental owners within five to ten years of retirement who want clarity about income reliability, management demands, and tax exposure.
In my work since 2005 with Phoenix-area property owners, I often see assets that were excellent long-term holds. Over time, the owner’s lifestyle and priorities shift.
The key question becomes direct.
Is this property delivering an acceptable return on investment for the equity involved, and does it fit your retirement and estate strategy?
If the answer is unclear, it is time to run the numbers.
A Clear Principle to Remember
A 1031 exchange does not improve performance. It allows you to move equity from one investment property to another while deferring capital gains and depreciation recapture, subject to IRS rules.
Performance analysis must come first.
Frequently Asked Questions About Who Should Consider a 1031 Exchange
What is depreciation recapture?
Depreciation recapture is the tax applied to depreciation deductions you claimed during ownership when you sell an investment property. It can increase your tax liability at sale and is often overlooked in planning.
Is a 1031 exchange only for large investors?
No. Many single-property landlords in the Phoenix metro area qualify. Equity position and performance matter more than portfolio size.
What if my rental produces steady income?
Steady income is positive. However, you still need to calculate return on equity and understand potential capital gains and depreciation recapture if you sell.
Can I use a 1031 exchange on my primary residence?
No. A 1031 exchange applies to investment or business property, not your primary home.
Do I need professional guidance?
Yes. You will need a qualified intermediary and coordination with your tax professional. A licensed Phoenix real estate agent helps manage valuation, negotiations, timelines, and replacement property strategy.
The Right Time to Evaluate Is Before You List
If you are asking who should consider a 1031 exchange, the better question may be whether your current rental property is delivering an acceptable return on investment and whether you understand your potential capital gains and depreciation recapture exposure.
I am Shirley Coomer, a licensed Arizona real estate agent with Keller Williams Realty, serving Phoenix, Chandler, Mesa, and surrounding East Valley communities. Since 2005, I have helped property owners analyze performance, evaluate equity, and plan strategic exits from investment property in coordination with their tax professionals.
If you are considering selling an investment property or want a clear asset performance test before making any decision, I can walk you through the numbers so you can make an informed choice. You can call or text me at 602-770-0643 or email me at scoomer@kw.com. If you are unsure whether a 1031 exchange fits your situation, that conversation is the logical next step.
