How a 1031 Exchange Works
Under IRC Section 1031, you can sell investment real estate and defer all capital gains taxes by reinvesting the proceeds into like-kind replacement property. The rules are straightforward, but the deadlines are absolute.
1
Sell Your Building
We list and sell your apartment building at maximum value. You must use a Qualified Intermediary (QI) to hold the proceeds — you cannot touch the money.
2
Identify Replacement Property
You have 45 calendar days from closing to identify up to three replacement properties in writing. This deadline cannot be extended.
3
Close the Exchange
You have 180 calendar days from your sale to close on the replacement property. The QI transfers funds directly to the seller.
The Tax Hit Without a 1031 Exchange
Selling without exchanging can mean losing more than 40 cents of every dollar of gain to taxes. Here is what you owe on a $1,000,000 gain:
Federal Capital Gains20%
California State Tax13.3%
Depreciation Recapture25%
Net Investment Income Tax3.8%
Combined tax on $1M gain — all deferred with a 1031$371,000+
Note: Measure ULA (4%–5.5% on sales above $5.3M in the City of LA) is not deferred in a 1031 exchange — you still owe it at closing. But the capital gains deferral is typically 5–10x larger than the ULA cost.
What You Can Exchange Into
1031 Exchange Case Studies
NNN Exchange
10 Units in Manhattan Beach → NNN in Texas
Partners dissolved. Exchanged into a 15-year Caliber Collision NNN lease. Eliminated all management responsibilities. Income went from $2,010/month to $8,063/month.
+301% Cash Flow Increase
DST Exchange
Duplex in Toluca Lake → 3 DSTs
Rent-controlled duplex exchanged into mineral rights, industrial, and self-storage DSTs across 4 states. Fully passive, no landlord responsibilities. Income went from $1,210/month to $6,232/month.
+415% Cash Flow Increase
NNN Exchange
18 Units in Van Nuys → 4 Dollar Generals
Escaped LA rent control. Exchanged into four brand-new 15-year corporate NNN leases. Income went from $6,354/month to $13,161/month with zero management.
+107% Cash Flow Increase
Out-of-State
4 Units in Monrovia → 33 Units in Cincinnati
Traded deferred maintenance and below-market LA rents for a well-maintained 33-unit with professional management. Secured a 3.7% interest rate. Income increase of 252%.
+252% Cash Flow Increase
DST Exchange
Pasadena Office → 127-Property DST Portfolio
Retiring owner exchanged $12M into the ExchangeRight DST portfolio spanning 127 properties across multiple asset classes. Income went from $30,637/month to $62,950/month.
+105% Cash Flow Increase
NNN Exchange
12 Units in Sherman Oaks → NNN Portfolio
Long-term owner sold at a record price per unit, then exchanged into a diversified NNN portfolio with multiple tenants and lease terms. Eliminated all property management and maintenance entirely.
+88% Cash Flow Increase
LA-Specific 1031 Exchange Issues
Escaping Rent Control via 1031
RSO and AB 1482 building owners can exchange into non-rent-controlled markets or newer construction exempt from rent control. Many of our clients exchange out of LA specifically to escape the regulatory burden and improve their cash flow.
Measure ULA and 1031
Measure ULA (4% on $5.3M–$10.6M sales, 5.5% above $10.6M; thresholds CPI-indexed) is not deferred in a 1031 exchange. You still owe it at closing. However, the capital gains, depreciation recapture, and NIIT that a 1031 defers are typically 5–10x larger than the ULA cost — the exchange still makes overwhelming financial sense.
California Clawback
California tracks deferred gains on out-of-state exchanges via Form 593 and will tax the gain when you eventually sell without exchanging. This does not affect the tax deferral itself — it simply means California follows the money. Proper planning with a tax advisor can address this.
Reverse 1031 Exchange
A reverse exchange lets you buy the replacement property before selling your current building. It costs $15,000–$25,000 in additional fees but eliminates the 45-day identification deadline pressure. Best suited when you have a specific replacement property lined up and don't want to risk losing it.
Ready to Explore a 1031 Exchange?
We've facilitated 100+ exchanges for LA apartment owners. We'll run the numbers on your building, model your replacement options, and walk you through every step of the process — no obligation.
Schedule a 1031 ConsultationFrequently Asked Questions
What percentage of apartment sellers use a 1031 exchange?
A significant percentage of our sellers utilize 1031 exchanges. Of those who exchange, 60% go into NNN properties, 25% into out-of-state apartments, and 15% into DSTs.
How much can a 1031 exchange improve my cash flow?
On average, our exchange clients saw an 85% increase in net cash flow. DST exchanges averaged 187%, out-of-state apartments 97%, and NNN properties 55%. Individual results vary based on the specific properties involved.
What are the 1031 exchange deadlines?
You have 45 calendar days from the closing of your sale to identify up to three replacement properties in writing, and 180 calendar days to close on the replacement. Both deadlines are absolute and cannot be extended for any reason.
Can I exchange an apartment building for a NNN property?
Yes. The IRS defines like-kind broadly for real estate — any investment or business-use real property can exchange for any other. 60% of our exchange clients move from LA multifamily into NNN properties.
What is a Delaware Statutory Trust (DST)?
A DST allows multiple investors to hold fractional ownership in institutional-quality real estate. The IRS confirmed in Revenue Ruling 2004-86 that DST interests qualify as like-kind property for 1031 exchanges. DSTs offer fully passive ownership, no personal financing requirements, and can close in 3–5 days. Minimum investments typically start around $100,000.
Can I exchange my rent-controlled building?
Yes. Many of our exchange clients sell RSO or AB 1482 buildings and exchange into non-rent-controlled markets (Texas, Arizona, Tennessee) or newer LA construction exempt from rent control. Escaping LA's regulatory burden is one of the most common motivations for exchanging.
Does Measure ULA affect my 1031 exchange?
Measure ULA (4%–5.5% transfer tax on sales above $5.3M in the City of LA) is not deferred in a 1031 exchange — you pay it at closing. However, the capital gains, depreciation recapture, and NIIT that a 1031 defers are typically 5–10x larger than ULA, so the exchange still makes strong financial sense.
How do you help with 1031 exchanges?
We have facilitated 100+ exchanges for LA apartment owners. We sell your building at maximum value, source replacement properties during escrow, coordinate with your Qualified Intermediary and DST sponsors, and structure closings to maximize tax deferral. Call (818) 270-1473 or email Luka.Leader@marcusmillichap.com to get started.