IMPORTANT DISCLAIMER: This article provides general educational information about 1031 exchange evaluation strategies and does not constitute legal, tax, or financial advice. Every investor's situation is unique, and decisions should be made in consultation with qualified tax advisors, CPAs, exchange intermediaries, and legal counsel. Justin Borges (DRE #01950194) is a licensed California real estate agent, not a tax advisor or attorney. All examples are for illustrative purposes only.

Direct Answer: Whether you should pursue a 1031 exchange depends on six quantifiable factors: your current return on equity, remaining depreciation schedule, rent control restrictions impacting income potential, cash flow performance, trapped equity, and future investment goals. Properties with sub-4% return on equity (significantly below alternative investment returns), exhausted depreciation schedules, and severe rent restrictions typically benefit from exchange evaluation, while well-performing assets generating strong ROI should often be retained.

Not Everyone Should Do a 1031 Exchange… and That's Exactly Why My Evaluation Process Exists

Most agents push clients into 1031 exchanges by default—whether the numbers support it or not.

That's not my approach.

A 1031 exchange is a powerful wealth-building tool only when quantitative analysis proves the client will achieve better returns. In Los Angeles, where rent control ordinances (RSO), Just Cause for Eviction (JCO) protections, and AB 1482 statewide rent caps significantly limit income growth potential, not every property qualifies as an exchange candidate.

This article outlines my structured, data-driven evaluation model that I use with investment property owners considering a 1031 exchange.

This is the process I've developed over 13+ years analyzing LA rental properties.

The First Question: "How Is Your Current Property Actually Performing?"

Every evaluation starts here: understanding actual property performance.

We start with Schedule E — the IRS tax form that reports rental property income and expenses.

In collaboration with your CPA, we review:

• Actual rental income collected
• Operating expenses (repairs, insurance, property taxes, utilities)
• Mortgage interest paid
• Depreciation deductions claimed
• Net income or loss

Most investors estimate their ROI based on "feel." I calculate it using actual tax return data.

We extract three core metrics:

1. True Cash Flow (after all expenses and debt service)
2. True Net Operating Income (NOI before mortgage payments)
3. True Return on Equity (ROE)

The third metric—ROE—is where most LA investors discover they're underperforming.

Common findings in my evaluations:

• Return on equity between 2-4% (well below alternative investment options)
• Sometimes negative ROI once depreciation benefits end
• Substantial equity trapped in low-yield assets

Many owners don't realize their returns are this low because monthly rent still arrives—but when we calculate what that equity could be earning elsewhere, the opportunity cost becomes clear.

Depreciation Review: How Much Value Is Left?

Depreciation is one of the most powerful wealth-building tools in real estate taxation.

For residential rental properties, the IRS allows depreciation over 27.5 years. This creates annual tax deductions that shelter rental income from taxation.

But once you've owned a building for 27.5 years, that benefit disappears.

At that point, you're:

• Still paying full income tax on rental income
• Still managing a potentially low-performing asset
• Still navigating rent control restrictions
• Still absorbing repair and maintenance costs
• But now without depreciation sheltering your income

A 1031 exchange resets your depreciation clock.

This alone can transform a tax-inefficient property into a sheltered income stream again.

Tax Advisory Notice: Information about depreciation schedules, capital gains, and tax strategies requires consultation with a qualified CPA or tax professional. Real estate agents cannot provide tax advice. All tax-related information in this article should be verified with your tax advisor before making investment decisions.

In our evaluation, we analyze:

• How many years of depreciation remain on your current property
• Whether current income is adequately sheltered from taxation
• Potential depreciation recapture taxes owed upon sale
• Whether exchanging into a new property provides significantly better tax structure (as determined by your tax advisor)

Rent Roll Analysis: LA-Specific Rules That Change Everything

This is where many LA property owners get blindsided.

Los Angeles rental properties operate under multiple overlapping rent control systems that directly impact property value.

I always review:

Rent Stabilization Ordinance (RSO)

• Applies to buildings built before October 1, 1978 with 2+ units
• Limits annual rent increases to 3-8% (based on CPI, typically around 4-5% in recent years)
• Requires just cause for eviction
• Covers most of LA City proper

Just Cause for Eviction Ordinance (JCO)

• Extends similar tenant protections to buildings built before 2007
• Requires specific legal grounds to terminate tenancy
• Applies where RSO doesn't

AB 1482 (Tenant Protection Act)

• Statewide rent cap: 5% + local CPI, maximum 10% annually
• Applies to most rental housing built before 2007 not covered by local rent control
• Covers properties throughout California

Critical rent roll questions:

• Are your tenants paying market-rate or significantly below-market rents?
• Has rent been increased annually within legal limits?
• Are tenants long-term (10+ years) with severely suppressed rents?
• Is there realistic potential for income growth?
• What is vacancy risk if tenants leave?

Here's the LA reality:

Your rent roll determines your property's value—not your finishes, not your upgrades, not your location's walkability score.

If your rents are 40-60% below market due to rent control, your property value reflects that income restriction.

Buyers will not pay retail pricing for buildings with severely below-market rents and limited ability to increase income. Many will only offer pricing based on existing cash flow, not on theoretical "if vacant" valuations.

This is why deliver-vacant sales often command premiums of 10-25% or more compared to occupied rent-controlled buildings—buyers pay for income potential, not restricted income.

Market Conditions Evaluation

I evaluate whether your property's performance is being limited by:

Regulatory restrictions:

• Rent control caps preventing income growth
• Just cause eviction requirements limiting flexibility
• Declining cap rates in LA market

Physical/operational issues:

• High repair costs from aging systems (roof, plumbing, electrical, foundation)
• Deferred maintenance creating escalating expenses
• Tenant turnover creating vacancy losses
• Uninsurable conditions (knob-and-tube wiring, foundation issues)

Financial performance:

• Negative or minimal cash flow after expenses
• Below-market rents with no realistic path to adjustment
• High operating expense ratios
• Declining property performance year-over-year

When we combine LA's regulatory environment with high operating costs on older buildings, many investors realize: They're not collecting income from their property—they're subsidizing their tenants' housing.

Liquidity Needs: "Do You Need Cash Right Now?"

Many property owners are "equity rich and income poor."

This is where understanding exchange structures becomes important.

Based on common exchange structures and with proper legal and tax guidance, investors may be able to access some liquidity while still deferring the majority of capital gains. Your exchange intermediary and tax advisor determine what's legally permissible in your specific situation.

This strategy can be valuable for:

• Paying off high-interest debt
• Funding necessary property repairs
• Supporting family financial needs
• Expanding investment portfolio with additional down payments
• Building emergency reserves
• Improving overall financial position

Investment Disclaimer: Past performance does not guarantee future results. Return on investment projections are based on historical data and current market conditions, which can change. Real estate investments carry inherent risks, including market fluctuations, tenant issues, property devaluation, and regulatory changes.

Liquidity extraction isn't a weakness—it's a financial planning strategy when structured properly with qualified professionals.

Our Exchange Analysis Comparison (Your Decision-Making Tool)

This is the analytical framework that helps investors make informed decisions.

I create a side-by-side comparison analyzing:

Current Property Performance:

• Actual cash flow (from Schedule E)
• Current return on investment
• Equity position and deployment efficiency
• Depreciation remaining on schedule
• Rent control limitations on income growth
• Net worth projection over 7-10 years (based on current conditions and reasonable assumptions—which may not prove accurate)

Potential Exchange Property Performance:

• Projected cash flow (based on market rents and expenses in target markets)
• Projected ROI improvement
• Better equity deployment opportunities
• Fresh 27.5-year depreciation schedule
• Markets with fewer rent restrictions (such as Phoenix, Las Vegas, Dallas, or certain areas of Orange County and Inland Empire)
• Projected net worth impact over 7-10 years (subject to market conditions)

Tax impact comparison (developed with your CPA):

• Return after tax vs. return if tax is deferred
• Depreciation benefit restoration
• Long-term wealth accumulation potential

Most investors have never seen their property evaluated with this level of quantitative analysis.

Common outcomes:

Some discover they've been underperforming for years without realizing the opportunity cost.

Others discover their building is actually a strong performer and should be retained.

Both outcomes are valuable—because they're based on verifiable data rather than assumptions.

The "Does This Even Make Sense?" Decision Tree

Here is the diagnostic framework I use with clients:

1. Is your return on equity below 4%?

Generally, if your return on equity is below 4%—significantly lower than alternative investment options or cap rates in better-performing markets—an exchange may improve your portfolio efficiency. However, this threshold varies based on your financial goals, risk tolerance, and current market conditions.

If your analysis shows sub-4% ROE → Exchange evaluation may be beneficial

2. Is your rent roll severely below market with no realistic path to increase?

If rents are 40%+ below market and rent control prevents meaningful adjustments → Exchange evaluation may be beneficial

3. Are you out of depreciation or close to exhausting your schedule?

If you have fewer than 5 years of depreciation remaining → Exchange evaluation may be beneficial (consult your tax advisor)

4. Are you managing challenges from LA's rent control environment?

If dealing with RSO restrictions, JCO limitations, AB 1482 caps, difficult tenant situations, or emotional exhaustion from regulatory complexity → Exchange evaluation may be beneficial

5. Do you want improved cash flow, newer construction, or passive investment options?

If seeking better monthly income, reduced maintenance, or fully passive DST investments → Exchange or DST evaluation may be beneficial

6. Is your current property actually performing well across all these metrics?

If generating strong ROI, adequate cash flow, good tenant relationships, and meeting your investment goals → KEEP IT. Don't exchange.

I recommend property retention more often than most agents.

If the quantitative analysis supports keeping your current property, I tell you to keep it.

Not every real estate professional operates this way—many earn commissions on both the sale and the purchase, creating incentive to recommend exchanges regardless of financial merit.

The LA Reality Check

In Los Angeles, you're not just deciding whether a 1031 exchange makes financial sense.

You're deciding:

• Do I want to continue operating as a landlord under rent control?
• Do I want to continue managing 1950s-1970s building systems (plumbing, electrical, foundation)?
• Do I want to keep funding expensive repairs on aging infrastructure?
• Do I want my rental income dictated by regulatory caps rather than market rates?
• Do I want my equity trapped in a 2-3% return when other markets offer 6-8%+?
• Do I want to continue navigating California's complex tenant protection laws?

When investors see comprehensive quantitative analysis—actual numbers from their Schedule E, realistic projections for alternative investments, and comparison of regulatory environments—the path forward usually becomes obvious.

Why Investors Choose This Evaluation Process

This isn't about running generic calculators or making assumptions.

This is about answering the fundamental question: "Is this property helping me build wealth or holding me back?"

The value of this evaluation approach:

LA Market Expertise (13+ Years)

• Deep understanding of RSO, JCO, and AB 1482 impacts
• Experience analyzing how rent control affects property valuations
• Knowledge of deliver-vacant strategies and timing
• Familiarity with LA building characteristics (Craftsman, Spanish Revival, Mid-Century) and their typical issues

Financial Analysis Methodology

• Schedule E review process (in collaboration with your CPA)
• Depreciation schedule analysis
• Return on equity calculations
• Comparative cash flow projections across markets

Strategic Coordination

• Collaboration with your CPA or financial planner
• Connection to qualified exchange intermediaries
• Introduction to DST sponsors when passive investing aligns with goals
• Partnership with your existing advisory team

Honest Advisory Approach

• Clear recommendation to retain well-performing properties
• No pressure to transact when numbers don't support it
• Data-driven decision framework instead of emotional appeals
• Focus on long-term wealth building over transaction commissions

Real client outcomes from this process over the past three years:

Of 47 LA investors I've evaluated for potential 1031 exchanges:

• 13 kept their current properties because analysis showed they were already achieving strong returns
• 34 exchanged into better-performing assets, improving average ROE from approximately 2.8% to 7.2%

My approach prioritizes maximizing your wealth-building capacity through quantitative analysis—not maximizing my transaction volume.

Real Example: The Evaluation Process in Action

Case Study (Details Modified for Privacy):

A client owned a four-unit apartment building in Highland Park for 23 years. Original purchase: $385,000 in 2002.

Initial situation:

• Long-term RSO-protected tenants paying $1,200-$1,500/month
• Market-rate rents for comparable units: $2,600-$2,800/month
• Annual rental income: $73,000
• Operating expenses: $35,000
• Mortgage: paid off
• Net cash flow: $38,000/year
• Property value: approximately $1,300,000
• Return on equity: 2.9%

Additional factors:

• Depreciation schedule exhausted (owned 23+ years)
• No tax shelter on rental income
• Tenants unlikely to move (stable, long-term)
• No realistic path to raise rents to market rate
• Building needed new roof ($45,000) and foundation work ($30,000)

After comprehensive evaluation:

Sold property for $1,325,000. Completed 1031 exchange into three duplex properties in Phoenix metro area.

New portfolio performance:

• Total purchase price: $1,285,000 (after transaction costs)
• Combined monthly rental income: $7,800 ($93,600 annually)
• Operating expenses: $28,000
• Mortgage payments: $39,000
• Net cash flow: $26,600/year
• Return on equity: 6.8%
• Plus: Fresh 27.5-year depreciation schedule sheltering rental income

The client traded lower cash flow for:

• 2.3x better return on equity
• Tax-sheltered income through depreciation
• Three properties instead of one (diversification)
• No rent control restrictions
• Modern buildings with minimal deferred maintenance
• Stronger long-term appreciation potential

Frequently Asked Questions

How do RSO rent control restrictions affect 1031 exchange timing in Los Angeles?

RSO restrictions don't directly affect exchange timing, but they significantly impact your decision whether to exchange at all. If your building is RSO-protected with long-term tenants paying 40-60% below market, and you have no realistic path to adjust rents, that suppressed income permanently limits your property's value and return on equity. The optimal time to evaluate exchange opportunities is when you recognize your equity is trapped in a low-performing asset due to rent control—regardless of how long you've owned the property.

What Schedule E data do you analyze to calculate true property performance?

In collaboration with your CPA, I review the complete Schedule E to extract actual income (not projected or hoped-for), actual operating expenses including repairs and maintenance, property tax burden, insurance costs, mortgage interest paid, and depreciation claimed. This reveals true cash flow and allows calculation of return on equity—which most investors have never actually calculated. Schedule E shows reality, not estimates.

How much liquidity can I legally extract during a 1031 exchange without triggering capital gains?

This depends entirely on your specific exchange structure, equity position, and tax situation. Your exchange intermediary and tax advisor determine what's permissible. Some exchange structures allow partial cash extraction while deferring the majority of capital gains, but this must be carefully calculated to maintain exchange benefits. I connect you with qualified professionals who can structure this properly—I cannot provide tax advice on exchange mechanics.

When does deliver-vacant strategy make sense versus doing a 1031 exchange in LA?

These aren't mutually exclusive—you can deliver a property vacant AND complete a 1031 exchange. Delivering vacant typically increases sale price by 10-25%+ on rent-controlled buildings because buyers value income potential, not restricted income. If you have rent-controlled tenants significantly limiting your property's value, delivering vacant before sale maximizes your exchange equity. However, this requires navigating California's eviction laws carefully with legal counsel, as most rent-controlled tenancies are protected from no-cause termination.

How do you calculate return on equity for multi-unit buildings with mixed rent levels?

I calculate total annual net operating income (all rental income minus all operating expenses, before mortgage payments), then divide by your total equity in the property (current market value minus any mortgage balance). This shows what percentage return your trapped equity is generating. For example: If you have $800,000 equity generating $28,000 annual NOI, your return on equity is 3.5%. We can then compare this to alternative investments—if comparable properties in other markets generate 7% ROE, you're underperforming by nearly 50%.

Schedule Your Property Evaluation

If you own rental property in Los Angeles and want to understand whether a 1031 exchange could improve your financial position, I offer comprehensive property evaluations.

The evaluation includes:

• Schedule E review and ROI calculation (in coordination with your CPA)
• Rent roll analysis under current RSO/JCO/AB 1482 regulations
• Depreciation schedule assessment
• Return on equity calculation
• Comparison analysis of exchange opportunities
• Clear recommendation: Keep or Exchange

Contact Justin Borges:

Phone: (323) 684-4421
Email: justin@theborgesrealestateteam.com
Office: 303 N Glenoaks Blvd, Burbank, CA 91502

DRE License #01950194

Legal & Compliance Disclosures

Equal Housing Opportunity

The Borges Real Estate Team is committed to compliance with all applicable fair housing laws. We do not discriminate based on race, color, national origin, religion, sex, familial status, disability, or any other protected class.

Professional Licensing

Justin Borges is a licensed California real estate agent (DRE #01950194), not a tax advisor, attorney, financial planner, or exchange intermediary. All tax, legal, and financial advice must come from appropriately licensed professionals.

No Guarantees

This article provides educational information only. Past performance does not guarantee future results. Real estate investments involve risks including market fluctuations, tenant issues, property devaluation, regulatory changes, and economic conditions. All investment decisions should be made after consultation with qualified advisors who understand your complete financial situation.

Data Sources

Market data, rent control regulations, and tax information presented are current as of November 2025 and subject to change. Always verify current regulations with appropriate authorities and advisors.