1031 Exchange Strategy for LA Apartment Owners
Selling an apartment building and want to defer capital gains? We've guided LA multifamily owners through 1031 exchanges into replacement properties across California and out of state. Every selling client of ours who wanted to complete a 1031 exchange has done so.
Start Your Exchange StrategyWhat Is a 1031 Exchange?
A 1031 exchange, named for Section 1031 of the Internal Revenue Code, lets you sell an investment property and defer the capital gains tax, including depreciation recapture, by reinvesting the proceeds into other like-kind real property. It defers the tax rather than eliminating it. For how the tax works and what it can cost without an exchange, read our guide tocapital gains and depreciation recapture.
Real property held for investment or business use can be exchanged for other like-kind real property. Since 2018, only real property qualifies.
You must identify your replacement property within 45 days after your building closes.
You must receive the replacement property within 180 days, or by the due date of your tax return (including extensions), whichever is earlier.
You cannot touch the sale proceeds. A qualified intermediary holds them and uses them to buy your replacement property.
To defer all of the tax, you generally buy replacement property of equal or greater value and reinvest all of the net proceeds. Cash or debt relief you receive can be taxable.
You generally identify up to three properties of any value, or more if they meet certain value limits. Your intermediary and CPA will confirm which rule fits.
The 45- and 180-Day Deadlines
Once your relinquished property closes escrow, two IRS deadlines start running in parallel. Both are hard cutoffs, not guidelines, which is why we start sourcing replacement options before your sale even closes.
- 45-Day Identification Window
- 180-Day Exchange Window
Selling late in the year? Read how your closing date interacts with these deadlines in our article ontiming a sale before year-end.
Three Common Routes for LA Apartment Owners
Apartments to Apartments
Many owners stay in multifamily, trading for larger buildings, more units, better cash flow, newer construction, or non-rent-controlled property, in Los Angeles or in other states. One Highlight client sold a 192-unit Westlake portfolio and exchanged into two Texas multifamily properties.
Read the Burlington case study →Triple-Net (NNN) Properties
In a triple-net lease the tenant pays property taxes, insurance, and maintenance, which removes the day-to-day work of managing property. One Highlight client sold her 24-unit Los Angeles apartment building and exchanged into two separate NNN properties, one in Florida and one in Georgia.
Read about the NNN exchange →Delaware Statutory Trusts (DSTs)
A DST lets you buy a fractional interest in a larger, professionally managed property as a passive investor, and DST interests can qualify as replacement property for an exchange. We introduce you to brokers who specialize in them.
Learn about NNN and DST options →Our 1031 Exchange Process
Start With Your Goals
In our first conversation we ask what you want from the sale: your goals, your plan, and what you want to own afterward. That includes which state you want to buy in and which asset class, whether apartments, triple-net, a DST, or a shopping center.
Price and Market the Building With the Exchange in Mind
We prepare a Broker Opinion of Value grounded in real closed comps and market your building to get the best price, while planning around your exchange deadlines from day one.
Meet the Top Brokers for Your Replacement Property
Based on the state and asset class you choose, we introduce you to three of the top brokers in that market and property type. You choose the broker you want to work with.
Connect With a Qualified Intermediary
We connect you with a qualified intermediary, who holds your sale proceeds so you never touch them, and we coordinate with your CPA and attorney to keep the exchange inside IRS requirements.
Work Hand in Hand and Keep You Informed
We stay in touch at every stage of the sale, so you always know where the transaction stands and what is coming next.
Start Making Offers While Still in Escrow
Once contingencies are removed on your sale, we encourage you to start making offers on replacement property, even while escrow is still open. Our clients usually have a replacement deal in place before their building closes.
Build In a Buffer
We add an option to extend the close of escrow by 30 days to every counter offer on the sale. If you have not found your replacement property yet, we exercise it, which gives you more time before the clock starts.
Close the Sale and Complete the Exchange
We stay with you through identification and closing on the replacement property, working with the replacement broker, your intermediary, and your advisors until the exchange is complete.
Time Is the Biggest Risk, So We Buy Time Up Front
Most failed exchanges fail on the calendar, not on price. Two things in our approach give you room. First, we get you comfortable making offers on replacement property right away, so you are not rushing to find a building on the last day of your 45-day window. Second, the 30-day closing extension option in every counter offer lets us push your close out when you need it. Because the 45 days only start when your sale closes, an extension of 30 days gives you as much as 75 days from the originally scheduled closing date to identify a property.
1031 Exchanges in Practice
The Burlington Portfolio
A 192-unit, three-building Westlake portfolio sold under new statewide rent control, exchanged into two Texas multifamily assets across state lines.
Read the case study →1513 Arlington Ave
Dual representation on a 9-unit Arlington Heights building drew 12 offers and moved deferred electrical and balcony work to the buyer for our seller’s 1031.
Read the case study →More Exchanges We Have Handled
1031 Exchange FAQs
What is a 1031 exchange?
A 1031 exchange, named for Section 1031 of the Internal Revenue Code, lets you sell an investment property and defer the capital gains tax, including depreciation recapture, by reinvesting the proceeds into other like-kind real property. It defers the tax rather than eliminating it.
How long do I have to complete a 1031 exchange?
You have 45 days after your sale closes to identify replacement property and 180 days, or until your tax return is due including extensions if that is earlier, to receive it. These deadlines are firm. If your sale closes late in the year, the 180 days can end early unless you file an extension, so talk to your CPA.
Do I have to buy replacement property in California?
No. Replacement property can be in another state, and many Los Angeles owners exchange out of state. California has its own reporting form for like-kind exchanges, and the deferred California gain generally remains taxable if you later sell the out-of-state property, so ask your CPA how it applies to you.
What if I cannot find replacement property in time?
If you miss a deadline, the exchange fails and the gain is generally taxable in the year of the sale. That is why we start early, encourage you to make offers while your sale is still in escrow, and build a 30-day closing extension option into every counter offer on your building.
Can I exchange into something passive?
Yes. Many owners exchange into triple-net properties or Delaware Statutory Trusts to stop managing tenants and property. We introduce you to brokers who specialize in those asset classes.
Does a 1031 exchange avoid the City of Los Angeles Measure ULA tax?
Not as far as we are aware. A 1031 exchange can defer your capital gains tax, but exchanges are not among the Measure ULA exemptions the City lists, so the transfer tax is still calculated on the sale. Confirm with your CPA or tax attorney.
This page is general information, not tax or legal advice. Rules and thresholds change, so confirm everything with your CPA or tax attorney. Sources:IRS Instructions for Form 8824,IRS Publication 544, and theCalifornia Franchise Tax Board Form 3840.
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