If you own investment property in Los Angeles, selling can trigger a surprisingly large tax bill.
LA multifamily properties have jumped in value over the past decade. A building you bought for $600K ten years ago could be worth $1.6M now, maybe more.
That's great on paper. The real challenge comes at closing.
Sell that property, and you're looking at capital gains taxes, depreciation recapture, and California state tax on top of it. Between federal and state, a big chunk of your sale proceeds disappears.
A 1031 exchange lets you defer those taxes and roll more money into your next property instead of cutting checks to the IRS.
What Is a 1031 Exchange?
A 1031 exchange (named after the IRS code section) lets you defer capital gains taxes when you sell an investment property and buy another one.
Think of it as a trade, not a sale. You're not selling your fourplex, paying taxes, and then buying something smaller with what's left. You're rolling the full proceeds into the next property. The tax bill just moves forward with your new building.
The key point: taxes are deferred, not erased. The gain carries forward.
If you eventually sell that replacement property without doing another 1031, you may have to pay the deferred taxes. But a lot of investors chain these exchanges together for years, sometimes decades. This keeps their capital working instead of shrinking every time they sell.
What Happens If You Sell Without a 1031 Exchange?
When an investment property sells without a 1031 exchange, the gain typically becomes taxable in the year of the sale.
That may include: - Federal capital gains tax (15–20%) - Depreciation recapture (25%) - California state tax (up to 13.3%) - Net Investment Income Tax (3.8%)
For properties that have appreciated significantly, the combined tax bill can be substantial.
Picture this: You bought a small multifamily property for $500K and sell it years later for $1.5M.
That $1M gain? Taxable. And all the depreciation you've been writing off for years? The IRS wants that back too.
After taxes, your $1M gain might be closer to $600K in usable proceeds. A 1031 exchange preserves the full $1M for reinvestment.
The Timeline That Matters
There are two critical deadlines:
1. 45 days from closing to identify potential replacement properties 2. 180 days from closing to complete the purchase of the replacement property
Miss either, and the exchange fails. The taxes come due.
That's why preparation is everything. We work with sellers to begin identifying replacement properties *before* the sale closes, not after.
Types of Exchanges
- Delayed exchange — Sell first, buy later (most common)
- Simultaneous exchange — Sell and buy on the same day
- Reverse exchange — Buy the replacement property before selling the original
- Construction / improvement exchange — Use exchange funds to improve the replacement property
Work With the Right Team
A 1031 exchange requires a Qualified Intermediary (QI) to hold the proceeds between sale and purchase. Choosing the wrong QI — or trying to handle it yourself — is one of the most common and costly mistakes we see.
We coordinate directly with your QI, tax advisor, and lender to make sure the timeline, identification rules, and reinvestment requirements are met without surprises.