What Is a 1031 Exchange? LA Investor's Complete Guide
A 1031 exchange is an IRS tax strategy that lets Los Angeles investors sell an investment property and reinvest the proceeds into another investment property without paying capital gains, state taxes, depreciation recapture, or Medicare surtax at the time of sale. It works only for investment properties (not primary residences) and lets owners reset their depreciation schedule, improve cash flow, and trade out of restrictive LA rent-controlled buildings. Investors use it to avoid a 30-40% tax hit, unlock trapped equity, and move into higher-performing assets.
Why 1031 Exchanges Matter So Much in Los Angeles
If you've owned investment property in Los Angeles for any amount of time, you've probably seen how quickly taxes, rent caps, and regulations can eat into your returns. That's why the 1031 exchange is so valuable: it's one of the last truly powerful tax strategies that still exists for real estate owners, and LA is one of the places where it quietly delivers the biggest benefit.
For many of my investors, a sale without a 1031 exchange triggers a combined tax hit north of 30-40%. Capital gains. State tax. Depreciation recapture. Medicare surtax. It adds up fast.
A 1031 exchange legally delays every one of those taxes so your entire equity can move into the next property and continue working for you.
But here's the part most people don't realize: A 1031 exchange doesn't just defer taxes. It resets your depreciation clock and dramatically increases your after-tax cash flow.
And in Los Angeles, with RSO, JCO, AB 1482, and some of the most tenant-protective laws in the country, a 1031 exchange is often the cleanest path to trading out of low-income, high-headache properties into something far more profitable.
This article breaks down everything you need to know.
What Exactly Is a 1031 Exchange? (Explained Simply)
A 1031 exchange comes from IRS Section 1031, which allows you to sell an investment property, reinvest into another investment property, and pay zero taxes at the time of sale.
It's not a loophole. It's not aggressive tax planning. It's one of the oldest pieces of the tax code, used by everyday investors and major institutions.
To qualify, you need two things:
- The property you sell must be investment property.
Examples that qualify:
Rental homes Apartment buildings Duplexes, triplexes, fourplexes Commercial property Mixed-use Land held for investment Industrial / warehouses
Primary residences do not qualify unless legitimately converted to rentals under IRS standards.
- The property you buy must also be investment property.
The IRS calls this "like-kind." In real language: investment property into investment property. That's it.
💬 Thinking about a 1031 exchange for your LA property? Text me your situation and I'll give you straight answers: (213) 444-2225
Why LA Investors Use 1031 Exchanges (The Real Reasons)
Most websites say the same thing: "You can defer taxes." Yes, that's true, but that's not the reason my clients exchange.
Here are the actual drivers for Los Angeles investors:
Reason #1: The tax savings are enormous
Example scenario: You're selling a $1.2M LA rental you originally bought for $500K.
Your tax bill without a 1031 might include:
20% Federal capital gains 25% depreciation recapture 9-13% California state tax 3.8% Medicare surtax
Combined federal and state taxes can exceed 30-40% depending on individual circumstances. Consult your tax advisor for your specific situation.
With a 1031? $0.
Reason #2: You get to reset your depreciation schedule
After 27.5 years, your depreciation is gone, and your cash flow gets taxed more heavily.
A 1031 exchange resets the depreciation basis on the new property. That means bigger shelter, lower taxable income, and higher after-tax cash flow.
It's one of the most overlooked benefits.
Reason #3: You can escape LA rent control
If you own RSO or JCO property, you already know: Rents are capped. Tenants have extensive protections. Turnover is nearly impossible. Rent increases lag far behind inflation. Legacy tenants may be 50-70% below market.
A 1031 exchange is how many LA property owners escape the regulatory burden.
Reason #4: You can move into newer, higher-yield, lower-headache assets
Many investors exchange into:
New-build multifamily Sunbelt markets Riverside / San Bernardino for higher cap rates Delaware Statutory Trusts (for passive ownership)
You're trading stress for return on investment.
Who Qualifies in Los Angeles?
You qualify if you're selling a rental property in LA, a multi-unit subject to RSO or JCO, a commercial building, a mixed-use property, or vacant land held for investment.
And you're buying another investment property.
Owners who typically benefit the most:
Long-term landlords with fully depreciated assets Owners with tenants far below market Investors locked into strict LA rent rules People who want to improve cash flow or go passive Those facing large tax bills from appreciation
If your gain is $150K+, a 1031 usually makes sense. If your gain is $400K+, it's almost a no-brainer.
Where LA Investors Are Exchanging To (Observed Patterns)
Based on observed market trends, LA investors commonly consider these destinations:
- Sunbelt States (Texas, Arizona, Nevada, Georgia, Florida)
Why? Higher cap rates. Newer buildings. Landlord-friendly laws. Better rent growth trajectories.
- Alabama (popular with improvement exchanges)
You can exchange into seven or eight homes and upgrade each one.
- Inland Empire (Riverside, San Bernardino)
Higher returns, less regulation, newer construction.
- Nearby but non-LA cities (Pasadena, Long Beach)
Still California, but less restrictive than city-of-LA RSO/JCO.
📊 Want to see the actual numbers on your property? I'll run a quick exchange analysis for you. Text me the address: (213) 444-2225
1031 Exchange vs. Other Tax Strategies
Strategy Tax Deferral Best For Complexity Timeline
1031 Exchange 100% deferred Investment properties High 180 days
Opportunity Zone Partial deferral New investments High 10 years
Primary Residence Exclusion $250K-$500K excluded Owner-occupied homes Low Must live 2 of 5 years
Installment Sale Spread over years Any property Medium Negotiable
Each strategy has specific IRS requirements. This table provides general comparison only. Consult your tax advisor.
The Bigger Point: 1031 Exchanges Let You Reposition Your Wealth
Think of a 1031 as a wealth accelerator.
Your equity doesn't go backward. It doesn't get taxed. It rolls forward and multiplies.
A property you bought 15 years ago for $600K may be worth $1.6M today, but the cash flow might be terrible under RSO.
A 1031 lets you sell, avoid taxes, trade into two or three better-performing assets, double or triple your cash flow, reset depreciation, reduce your landlord duties, and increase long-term wealth.
The exchange is simply the vehicle. The upgrade is the goal.
When a 1031 Exchange Makes Sense (And When It Doesn't)
It makes sense when:
Your depreciation is almost gone Your rent is far below market Your cash flow is weak compared to your equity You want a newer or better-performing property You want to be more passive (DSTs) Your tax liability is over $150K You're tired of LA regulations You want higher returns in more flexible markets
It may not make sense when:
You need all cash out You want to stop owning real estate entirely Your gain is small You don't want the complexity of a transaction You have short-term residency/tax issues
Most investors I meet actually should exchange. They've just never had someone run the numbers correctly.
Common 1031 Exchange Mistakes LA Investors Make
Mistake #1: Waiting Until After Sale to Plan
The exchange must be set up before closing. I've seen investors lose their 1031 eligibility by not having a Qualified Intermediary in place at signing.
Mistake #2: Underestimating LA Market Timing
The 45-day identification period is tight in competitive LA markets. Properties you identify may go under contract before you can close.
Mistake #3: Not Accounting for Debt Replacement
If you have a $500K loan on the property you sell, you must have at least $500K in debt or additional cash on the replacement property.
Mistake #4: Touching the Proceeds
Even one dollar taken outside the exchange kills the entire 1031. The funds must stay with the Qualified Intermediary from start to finish.
The Borges Team Role
My job in a 1031 exchange is to analyze your Schedule E, run our Exchange Analysis Spreadsheet, forecast cash flow versus new opportunities, prep and sell your downleg for maximum leverage, and identify ideal upleg targets early, before listing.
I coordinate with tax advisors, Qualified Intermediaries, DST advisors, property managers, and lenders to ensure the entire process is fully planned before Day 1.
Most 1031 issues happen because the client waited too long or worked with professionals who don't specialize in exchanges. I eliminate that risk.
Frequently Asked Questions
Does a 1031 exchange eliminate taxes forever?
No, it defers taxes. If you exchange repeatedly and then pass the property to heirs, the basis steps up at death and taxes may be eliminated.
How long do I need to hold the replacement property?
IRS guidance suggests "intent to hold for investment," often interpreted as 1 to 2 years.
Can I move into the replacement property later?
Yes, but strict rules apply. It must first be held as an investment property.
Do I need a Qualified Intermediary?
Yes. Touching the funds kills the exchange.
What is a Qualified Intermediary and why do I need one?
A Qualified Intermediary (QI) is a third party who holds your sale proceeds during the exchange. You're required to use a QI because touching the funds yourself disqualifies the entire exchange. The QI fee typically ranges from $800 to $1,500.
Can I exchange one property for multiple properties?
Yes, you can exchange one property for up to three replacement properties without restriction. If you want to identify more than three, special IRS rules apply based on value thresholds. Most investors stick with the three-property rule for simplicity.
Ready to Explore a 1031 Exchange for Your LA Property?
I help Los Angeles property owners navigate 1031 exchanges from initial analysis through closing. Whether you're selling a rent-controlled building in LA or looking to upgrade into higher-performing assets, I'll analyze your specific situation and create a customized exchange strategy.
What you get:
Schedule E analysis to project your tax impact Cash flow comparison: current property vs. replacement options Qualified Intermediary coordination Replacement property identification support Complete transaction management from listing to closing
📱 Ready to talk about your specific property? Text me directly at (213) 444-2225 or schedule a full consultation here → Justin Borges | Licensed CA Real Estate Broker | Specializing in 1031 Exchanges & Investment Property
Legal Disclaimer: This article is for educational purposes only and does not constitute tax, legal, or financial advice. 1031 exchange rules are complex and subject to strict IRS requirements. Every investor's situation is unique. Before proceeding with any 1031 exchange, consult with a qualified tax advisor, attorney, and/or financial planner familiar with your specific circumstances. The Borges Real Estate Team does not provide tax or legal advice.
About the Author: Justin Borges is a licensed California real estate broker (DRE# 01940318) specializing in investment property transactions and 1031 exchanges throughout Los Angeles County. With deep expertise in RSO, JCO, and complex tax-deferred strategies, Justin helps property owners maximize returns while minimizing tax liabilities. Based in Los Angeles, he serves clients across LA County including Pacific Palisades, Brentwood, Santa Monica, and the Westside.
