1031 Exchange Services
Compare replacement property choices around less management, cash flow, more units and ownership control. Plan the sale and exchange with the appropriate advisers.
How a 1031 Exchange Works
Section 1031 can defer recognition of gain on a qualifying exchange of business or investment real property. Eligibility depends on the property and transaction, including any cash or other property received. A DST interest requires review of the particular trust structure. Read the IRS exchange guidance and confirm the proposed exchange with your tax adviser.
Day 0
Your building sells and closes
By Day 45
Identify replacement property in writing
By the Closing Deadline
Earlier of 180 days or the tax return due date, including extensions
Day 0
Your building sells and closes
By Day 45
Identify replacement property in writing
By the Closing Deadline
Earlier of 180 days or the tax return due date, including extensions
Plan for both deadlines. Identify replacement property within 45 calendar days after the sale, and complete the exchange by the earlier of 180 calendar days or your federal return due date for that tax year, including extensions. Weekends and holidays do not ordinarily extend these periods. Limited IRS relief may apply to qualifying events. Confirm your dates with your qualified intermediary and tax adviser. Review the IRS deadline guidance.
Exchange Requirements
- Arrange a deferred exchange with the qualified intermediary before the sale closes. Review restrictions on receiving the proceeds.
- Confirm that both properties and the exchange structure qualify.
- Have the tax adviser review equity, liabilities, costs and any cash or other property received.
- Review taxpayer identity and title before signing replacement purchase documents.
Review the Tax Consequences Before Selling
A single tax rate cannot estimate every owner's sale. Ask the tax adviser to compare an outright sale with the proposed exchange using the actual ownership, basis, depreciation and transaction costs.
| Review | Information Needed | Decision |
|---|---|---|
| Sale and adjusted basis | Purchase, improvement and depreciation records | Estimate gain and the owner's tax consequences |
| Exchange structure | Equity, debt, costs and replacement ownership | Determine qualification and any recognized gain |
| Replacement depreciation | Carryover basis and acquisition details | Calculate the applicable depreciation treatment |
| State and local requirements | Property locations and owner circumstances | Review filing requirements and sale costs |
Deferral and basis need separate calculations. An exchange does not automatically reset the entire depreciation basis. Review the IRS exchange and basis explanation with the tax adviser.
What You Can Exchange Into
Compare daily work, cash available, ownership control and capital needs. Local apartments, out-of-state apartments and trading into a larger building belong in the discussion alongside NNN and DST choices.
NNN Properties
Direct property ownership with responsibilities set by the lease. Review tenant credit, remaining lease term, retained costs, debt and the plan for a vacancy or renewal.
Apartment Properties
Compare local and out-of-state buildings, including a trade into more units. Underwrite collections, operating costs, management, financing, capital work and the rules for the specific location.
DSTs
A beneficial trust interest with delegated property work and less direct control. Review the actual assets, debt, fees, projected distributions, transfer restrictions and exchange qualification.
Exchange Deep Dive Guides
Start with the comparison of ownership, management and cash flow. Confirm tax requirements using the primary sources.
NNN vs. DST and Apartment Choices
Compare direct ownership, trust interests, local apartments, out-of-state apartments and trading up.
IRS Exchange Requirements
The IRS explains qualifying property, written identification and the receipt deadline.
SEC Private Placement Bulletin
Understand the disclosure, liquidity and loss risks of a private placement before reviewing an offering.
Compare Cash Available After Debt and Capital Work
Compare the current building and each replacement using consistent assumptions. A quoted cap rate is not the owner's cash return, and a projected distribution is not guaranteed income.
- Start with actual collections and supportable operating expenses.
- Subtract debt service using the proposed financing terms.
- Account for cash reserved or spent on capital work, counting each cost once.
- Review the equity required and test lower collections, repairs and the next loan maturity.
- For a DST, review fees, debt, reserves and the assumptions behind projected distributions.
Cap rate uses net operating income before debt service. Ordinary operating expenses already included in NOI should not be deducted a second time. Read the replacement comparison →
The LAAA 1031 Exchange Process
We coordinate the brokerage work around the apartment sale and replacement search. The qualified intermediary, tax adviser and any securities professional handle their respective parts of the transaction.
Review the building's value, estimated sale proceeds and replacement goals. Your tax adviser evaluates the tax consequences; we help compare the property choices.
Prepare property materials and reach buyers whose operating experience and capital fit the building. Evaluate offers by price, contingencies, funding and timing.
Compare local and out-of-state apartments, net lease properties and any DST offerings under consideration. Review availability, condition, financing and remaining work before the sale closes.
Arrange the deferred exchange with the qualified intermediary before closing. Confirm the written identification deadline and the earlier of the 180-day or tax return deadline with the intermediary and tax adviser.
Coordinate the property purchase with the selling broker, lender, qualified intermediary and escrow. Any securities professional handles offering-specific requirements for a DST investment.
Keep closing records for the tax adviser to calculate basis and depreciation. Discuss property management referrals and future property needs with the appropriate professionals.
LA-Specific 1031 Exchange Issues
Property Rules Vary by Location
Compare the operating requirements for the actual replacement. A different state or newer building does not by itself establish the taxes, tenant rules or management work that apply.
Budget Sale and Replacement Costs
Include the applicable transfer taxes, transaction costs, financing costs and property reserves in the comparison. Have the tax adviser separate income-tax consequences from other sale costs.
Partnership and LLC Exchanges
Review the selling taxpayer, replacement ownership and any proposed partnership changes with tax and legal advisers before entering contracts. Do not assume partners can separately exchange their interests in the entity.
Reverse Exchanges
If a replacement needs to be acquired before the current property sells, discuss a qualified exchange accommodation arrangement with the intermediary and tax adviser. Review its separate timing, funding and documentation requirements.
1031 Exchange FAQs
Rank the goals: less daily management, cash available to spend, more units, ownership control or a different market. Compare the actual NNN property, DST offering or apartment building using its costs, debt, capital needs and operating requirements.
There is no promised increase. Compare collectible income after operating expenses, debt service and capital needs with the equity required. A cap rate is not the owner's cash return, and a projected DST distribution is not guaranteed income.
Yes. Sale pricing, replacement availability, financing and property expenses affect the comparison. Evaluate the current building against specific replacement candidates rather than assuming a stronger or weaker market produces the same result.
A DST is a trust structure in which investors can hold beneficial interests. Revenue Ruling 2004-86 describes a structure eligible for Section 1031 treatment when the other requirements are met. Review the actual trust, assets, debt, fees, distribution assumptions and investor rights with the appropriate advisers.
Identify replacement property in writing within 45 calendar days after transferring the relinquished property. Complete the exchange by the earlier of 180 calendar days after that transfer or the federal income tax return due date for that tax year, including extensions. Weekends and holidays do not ordinarily extend these periods. Limited IRS relief may apply to qualifying disasters or other specified events; confirm your exact dates and eligibility with your qualified intermediary and tax adviser.
Qualifying investment real property can be like-kind across property types. Confirm the particular exchange with the qualified intermediary and tax adviser. Separately review the lease, tenant, financing and any owner obligations; NNN does not establish guaranteed income or zero work.
If a replacement needs to be acquired before the current property sells, discuss a qualified exchange accommodation arrangement with the intermediary and tax adviser. It has separate timing, funding and documentation requirements. IRS Publication 544 describes the applicable safe harbor.
Planning to Sell Your LA Apartment Building?
Discuss your sale and replacement goals before listing. Compare less management, cash flow, more units and a different market.
16830 Ventura Blvd, Ste. 100, Encino, CA 91436 | (818) 212-2808