A 1031 exchange defers federal and California capital gains tax when you sell one investment property and reinvest the proceeds into a like-kind replacement within 45 and 180 days.
Under IRC Section 1031, real property held for investment can be exchanged for other investment real property without triggering immediate capital gains or depreciation recapture tax. Two hard deadlines: 45 days to identify replacements in writing, 180 days to close.
The tax is deferred, not eliminated — it rolls into the replacement property's basis. Held until death, the deferred tax is eliminated entirely at stepped-up basis.
For LA multifamily sellers with significant appreciation (Prop 13 basis well below market), 1031 exchanges routinely preserve $500,000 to $2 million+ in tax that would otherwise apply on a straight sale. Common LA 1031 structures: in-state replacement, out-of-state multifamily (higher cap rate markets), DST for passive income.
From the Sterman LA Multifamily Glossary — defined the way a broker with $1.41 billion across 254 closed transactions actually uses these terms.
Michael Sterman, Senior Managing Director Investments, Marcus & Millichap.
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