SAN FRANCISCO—Wouldn't it be convenient if someone had clear, intelligent answers to most of your CRE-related questions? Problem solved. Nina J. Gruen, a.k.a. Ms. Real Estate, a.k.a. the principal sociologist overseeing market research and analysis at Gruen Gruen + Associates, is here to answer readers' questions.

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Dear Ms. Real Estate:

I am right in the middle of trying to figure out what to do with my 1031, so it occurred to me it might be a good idea to ask Ms. Real Estate. I understand that they come with additional loan features which make them look—perhaps deceptively—better as an investment. What should I look for in a 1031 exchange?

—Examining All My 1031 Tax Options.

Dear 1031 Tax Options,

When Ms. Real Estate sees or hears the words “tax free,” her first advice is be wary! After the financial results of a tax-avoiding deal are counted up, it's not unusual to hear the refrain, “I should have paid the tax.” Be particularly careful if you are in one of the regions where real estate market values are on a trajectory to the moon, and have a tax lawyer familiar with the intricacies of the Internal Revenue Code Section 1031 regulations brief you on your options and review the assumptions behind your analysis of investment deals you are considering.

The tax attorney will probably tell you that avoiding the tax will require you to invest 100 percent of the cash you obtain by the sale of your property, as any cash you take out will be taxable, although after one year you would be allowed to refinance the property. What this means is that you need to test the net cash returns from any replacement property you are considering against the cash returns you would obtain from alternative investments obtainable with the cash you would have left if you paid the capital gains tax. So you and/or your investment advisor should input all the costs and expected revenues of the like-kind replacement property, including all the closing costs and any loans you will have to accept, into a spreadsheet that quantifies a ten-year or so forecast of your future earnings. When inputting the lending costs, you may want to run two scenarios: One that includes retiring the old loan and assuming a new one, and the other assuming no refinance. Then compare those returns with the net cash flow from alternative investments paid for with the cash you have left after you pay your capital gains tax instead of engaging in a 1031 exchange.

If you think this reads like Real Estate 101, you're right. But that's what you need to remember when considering the lure of a 1031 exchange.