1031 Exchange Los Angeles Multifamily

You have sold your investment property. Now what?

What our LA multifamily clients have done with their sale proceeds, post-sale…

Perhaps the most common question we get from our LA multifamily clients when contemplating a sale is: “If I sell, what do I do with the money?” There is no one single right or wrong answer to this question. It’s situational. Sometimes the right answer is you should not sell at all.

But for the ones who have sold, we have seen a few various paths taken by the Sellers in terms of their next step and how they invest their sale proceeds. Of the last 20 or so transactions that we have completed, below are a few different paths taken by the Sellers post-sale, many of course with the goal in mind to avoid paying capital gains taxes.

1031 Exchange into Local Properties

Chances are, if you’re reading this, you have at least heard of the term 1031 Exchange. In case you haven’t, a 1031 Exchange is a tax loophole which allows Sellers of investment properties to defer paying capital gains taxes by selling their properties and purchasing a ‘like-kind’ property of equal or greater value than the property they are selling.

For real property transactions (rental houses, farmland, office buildings, strip malls, etc.) the “like-kind” requirement does not mean selling and buying the exact same type of property. Some of our clients have sold a 6-unit apartment building and 1031-exchanged into a 30-unit across town. Some have sold a 12-unit and traded down into one (or more) 4-plexes for their kids. Others have sought to exit apartments permanently and have traded into commercial strip malls locally. It varies on a case-by-case basis.

1031 Exchange into Out-of-State Properties

Under 1031 Exchange provisions, you do not have to sell and purchase in the same state. In other words, you can sell your LA property and 1031 into another state. Some investors are no longer buying in California as a result of increased regulation. Some of our clients have sold their LA multifamily properties and traded into properties in Sunbelt states such as Texas or Arizona – many with the intent of escaping the unforgiving rent control Laws in Los Angeles and California as a whole.  

Other clients have sold their LA properties and purchased out-of-state “triple-net” properties (ie CVS, Walgreens, Dollar General etc) – where they simply collect rent from large commercial tenants without having to pay property taxes, maintenance or insurance for the property (ie nets).

1031 Exchange into Delaware Statutory Trusts

Some of our clients who are tired of direct ownership and oversight of a property, and prefer a completely hands-off investment such as a Delaware Statutory Trust, which also qualifies for a 1031 tax-deferred Exchange.

A Delaware Statutory Trust (DST) permits fractional ownership where multiple investors can share ownership in a single property or a portfolio of properties, which qualifies as replacement property as part of an investor’s 1031 exchange transaction. A DST takes all decision-making out of the hands of investors and places it into the hands of an experienced sponsor-affiliated trustee.


One or two of our clients have also carried paper or “Seller Financed” their transaction. Seller financing in real estate is, quite literally, when the seller of a property finances the transaction. The buyer furnishes a down payment and borrows the rest from the seller.

The seller essentially acts as the bank and holds a note, for which they are paid interest by the Buyer. There are certain tax advantages to this: An installment sale is taxed differently than a regular sale in that each installment is taxed in the year received, making it favorable for sellers who want to spread out their tax liability over a number of years instead of paying 100% of the tax in the year of sale.

Some Just Pay Capital Gains Taxes

Believe it or not, there is a large component of Sellers out there who are just done with real estate entirely. They simply do not want to own another piece of property or fractional share of a property. As a result, the transaction would result in the Seller paying Capital Gains taxes on the sale, which between State and Federal can be a significant amount depending on the situation.

Note: The above should not be construed as tax or financial advice. If you are considering any of the above, please seek the assistance of a qualified CPA and/or tax attorney

1031 Exchange Los Angeles Multifamily

Mid City LA 8-Unit Sells to All Cash 1031 Exchange Buyer

8 Units Closed in Up-and-Coming Mid-City Los Angeles

We recently represented both the Buyer and Seller of 4606 St. Charles Avenue. Los Angeles, CA 90019. This was an off-market transaction sold by a long-term family owner on the Seller-side to a 1031 Exchange Purchaser. The value-add property consisted of 8 units constructed in the early 1960s located in the heart of Mid-City Los Angeles nestled in between Washington Blvd and Venice Blvd just east of La Brea, which is a very up-and-coming rental submarket.

I have always been a big fan of this particular pocket of Mid-City Los Angeles for many reasons, not the least of which is the location. It is close to major arteries (in this case La Brea, Washington and Venice) and is a short distance to the 10 Freeway and Expo Line which bridges Santa Monica to DTLA. In the immediate surrounding area of this property you will find numerous multifamily properties which have been vastly improved by value-add investors, as well as a spate of newly constructed units and small-lot subdivisions either recently completed or under construction, which target a tenant-base consisting of highly qualified renters who are priced out of areas to the north and west like Mid-Wilshire, Beverly Grove, Culver City, Palms and Pico Robertson.

The purchaser was a local investor who owns a few similar properties locally and was looking to reinvest the proceeds from a sale of another property via a 1031 tax-deferred exchange. 1031 Exchange laws are such that an exchange Buyer has to transact within a certain timeframe or risk paying what could be tremendous capital gains taxes on the gains from the property that they sold. The purchaser plans to slowly renovate the units as tenancies turn and hold long term.

Transaction Details

  • $1,775,000 Sale Price
  • 8 Units
  • 6,508 SF
  • $221,000/Unit
  • $272/SF
  • One 2-Bedroom vacancy at closing
  • All Cash Transaction
  • 21 day total Escrow

See additional photos below:

1031 Exchange Biden Tax Plan

The Biden Tax Plan and Its Effects on Real Estate

In the multifamily investment sales space, I deal with many families in the private capital arena – small property owners who own anywhere from one to five real estate assets, many of which they have owned for many years. Usually the story goes: matriarch/patriarch purchased an investment property in the 1980s for let’s say $500,000 which is now today worth let’s say $2,500,000.

If and when these folks decide to sell, there are a few paths that they can take. They can utilize a 1031 Exchange, allowing them to sell their property and purchase another with the proceeds of the sale to avoid paying capital gains taxes (on what would be approximately $2,000,000 of gains given the example above). Others do not sell and leave the property to their heirs when they pass away allowing the heirs to utilize the “step up in basis” loophole where they are able to sell the property with little to no capital gains exposure. And then there are some long term owners just bite the bullet, sell their property and actually pay the capital gains taxes. Virtually all of these options are at risk with Biden’s new tax proposal.

1031 Exchanges At Risk

The Biden plan would eliminate the ability to conduct an exchange when capital gains are greater than $500,000. For the example above, that family would not be able to utilize the 1031 Exchange tax loophole allowing them to defer their capital gains taxes by purchasing a replacement property.

Elimination of the “Step Up in Basis”

The Biden administration has called for ending the ability to “step up” the cost basis for real-estate when it is inherited. The stepping up allows heirs to calculate capital gains on the sale of property using the market value at the time they inherited it, rather than when it was originally purchased. Stepping-up the basis can reduce the tax burden for heirs considerably under these circumstances.

Increase in Capital Gains Rate

Perhaps the most critical component of Biden’s tax proposal is the increase of the tax rate on capital gains for households making over $1 million. The plan proposes raising the rate to 39.6% for, up from 20% where it current stands for the country’s top earners.

All in all, these components of Biden’s tax proposal would not be good for real estate owners.

1031 Exchange

Selling Your Property to a 1031 Exchange Buyer? What You Should Know.

If you own a multifamily property in Los Angeles, chances are that you have received a call from someone like me saying “I am working with a Buyer who is in a 1031 Exchange who would like to purchase your building.”  While there are certainly benefits to selling your property to an ‘Exchange Buyer’, they are not always the best option.

For those that are new to 1031 Exchanges, they are a tax loophole which allows property owners to sell an investment property and buy a replacement property of equal or greater value with the proceeds of the sale, while completely deferring any capital gains taxes that they otherwise would have had to pay if they did not purchase a replacement property.  There are various other benefits to conducting a 1031 Exchange, which I will save for another time.

A 1031 Exchange Buyer HAS to Buy a Property or Pay Taxes

Perhaps what is most attractive about selling to a 1031 Exchange Buyer is the fact that the Buyer has to purchase a replacement property, because if they do not purchase a replacement property, they will risk paying capital gains taxes on the proceeds of the property that they sold (which depending on the deal can be millions of dollars). 

A 1031 Exchange Buyer is on the Clock to Buy

Not only does an Exchange Buyer have to transact, but they are also under the gun to do so from a timeframe standpoint.  An Exchange Buyer has 45 days from the close of their sale to identify a replacement property and 180 days to close on the purchase of their replacement property.  So to recap, if you have your building on the market with multiple offers and there is an Exchange Buyer at the table, you know that a) the Buyer has to purchase something and b) he/she is on the clock to do so and c) in many instances Exchange Buyers are all cash Buyers.  Sounds good right?

The Catch

The catch is that Exchange Buyer can identify up to 3 separate replacement properties and in some cases more than 3.  As a result, sometimes Exchange Buyers will go into escrow on 3 different replacement properties with the intention of only purchasing one and cancelling escrows on the others.  In addition, what is a pertinent piece of information to know about an Exchange Buyer is where they are in the process of the property they are selling.  Ideally, they have already closed on the sale of that property and are in their 45 day identification window – but this is not always the case.  Many times, Exchange Buyers are still early in the escrow process of their sale and in some cases have not even begun the sale process, in which case they are not even in a position to buy!

All in all, while your ears may perk up when you hear the term ‘Exchange Buyer,’ you must also beware of the risks.

1031 Exchange

What is a Delaware Statutory Trust (DST)?

When conducting a tax-deferred 1031 exchange, there are a multitude of options in terms of what type of property to trade into. Some investors will sell a multifamily property and buy another multifamily property, either larger or smaller than the property they sold. Others trade into different product types such as industrial and retail (NNN properties). However even with the most hands-off NNN retail property (such as a Walgreens, CVS, Dollar General etc.) where the tenant is responsible for the maintenance, property taxes and insurance, is it still really hands-off? What happens if that tenant leaves and you are left with 25,000 SF of empty space 35 miles outside of Albuquerque, NM? Enter Delaware Statutory Trusts. I have seen many of my clients trade into DSTs and while I am not advocating for or against them, below is some information about what they are and how they work.

Delaware Statutory Trusts
Delaware Statutory Trusts (DST) are not new, but current tax laws have made them a preferred investment vehicle for passive 1031 Exchange investors and direct (non-1031) investors alike. DSTs are derived from Delaware Statutory law as a separate legal entity, created as a trust, which qualifies under Section 1031 as a tax-deferred exchange.1

In 2004, the IRS blessed DSTs with an official Revenue Ruling about how to structure a DST that will qualify as replacement property for 1031 Exchanges. The Revenue Ruling (Rev. Ruling 2004-86) permits the DST to own 100% of the fee simple interest in the underlying real estate and may allow up to 100 investors to participate as beneficial owners of the property.2

How Delaware Statutory Trusts Work
The real estate sponsor firm, which also serves as the master tenant, acquires the property under the DST umbrella and opens up the trust for potential investors to purchase a beneficial interest. The investors may either deposit their 1031 Exchange proceeds into the DST or purchase an interest in the DST directly.

DST investors may benefit from a professionally managed, potentially institutional quality property. The underlying property could be a 500-unit apartment building, a 100,000 square-foot medical office property, or a shopping center leased to investment-grade tenants. Most DST investments are assets that your run-of-the-mill, small- to mid-sized accredited investors could not otherwise afford. However, by pooling money with other investors, they can acquire this type of asset.

Investors who are familiar with the tenants in common (TIC) investment strategy may see some similarities in the DST concept; however, it is important to understand the differences between the two concepts. While a TIC may have up to 35 investors, each owning an undivided, pro-rata share of the title to the property, a DST may have up to 100 investors (sometimes more), with each investor owning a beneficial interest in the trust which, in turn, owns the underlying asset.3

DST vs. TIC Ownership
There are two benefits that the DST structure offers over the TIC concept. One is that because a DST is not limited to 35 investors, the minimum investment may be much lower, sometimes in the $100,000 range. The second major advantage is that in a DST, the lender makes only one loan to one borrower: the DST’s sponsor.

In a TIC investment, the lender can fund up to 35 separate loans, one to each investor.3 In times of tight money, however, the DST gives the lenders greater security because the lender has fully qualified the sponsor, who is the underlying responsible party.

Be aware that the higher number of investors, plus the larger number of shares, may or may not protect your investment; careful scrutiny of the controlling partner/sponsor is advised. There are a lot of crooks in this business.

Risks Involved
DSTs are not without risks. As with any real estate investment, investors may be subject to high vacancy rates and loan defaults. It is also important for investors who may be considering the DST strategy to consult with an experienced investment professional and obtain competent legal and tax advice. The DST structure may be a viable investment alternative for qualified real estate investors, but only your tax adviser and a lawyer can tell you if it is right for you.