1031 Exchange Basics for Apartment Owners

A 1031 exchange lets you sell an investment property and buy another without paying capital gains tax now. Many long-time LA apartment owners use it to trade into a larger building, a different market, or a lower-maintenance property.

The key rules

• Like-kind. Any real property held for investment or business use can be exchanged for other investment real property. An apartment building can be exchanged for another apartment building, a retail center, land or a Delaware Statutory Trust (DST) interest.
• Qualified intermediary. The sale proceeds must go to a qualified intermediary, not to you. Touching the money ends the exchange.
• 45 days to identify. You must identify replacement properties in writing within 45 days of closing your sale.
• 180 days to close. You must close on the replacement property within 180 days of the sale (or your tax return due date, if earlier).
• Equal or greater. To defer all tax, buy property of equal or greater value and reinvest all net proceeds. Cash or debt reduction you keep ("boot") is taxable.

Common mistakes

• Starting the search for a replacement after listing instead of before. 45 days goes fast.
• Not lining up financing for the replacement property early.
• Forgetting that a 1031 exchange does not avoid Measure ULA or other transfer taxes.
• Taking title to the new property in a different name than the one that sold.

Options if you want to stop managing

• Triple-net (NNN) properties, where the tenant pays most expenses.
• DSTs, fractional interests in large professionally managed properties.
• Out-of-state markets with lower prices and fewer rent rules.

We plan the sale and the purchase together so your timeline works. Start with a valuation.

General information, not tax advice. Work with your CPA and a qualified intermediary.

Common questions

How long do I have to find a replacement property in a 1031 exchange?

45 days from the sale to identify replacement property in writing, and 180 days to close.

Can I 1031 exchange an apartment building into a different type of property?

Yes. Any investment real property qualifies, including retail, industrial, land or a DST interest.