Every LA multifamily seller eventually runs into the question: defer the tax through a 1031 or take the taxable sale and move on. The default recommendation in the brokerage industry leans hard toward 1031 because it makes the transaction bigger — more legs, more fees, more activity. That is a brokerage incentive, not a client recommendation. The honest answer is that a 1031 is correct in some situations, wrong in others, and a drag on net outcomes when the mechanics are forced where they do not belong.
Long-held LA multifamily with a basis that has compounded for decades has the largest tax exposure of any position in real estate. A building held for twenty-plus years, depreciated through each of those years, with a cost basis sitting at a fraction of current sale price, faces federal capital gains tax, California state tax, and depreciation recapture simultaneously. On a large sale, the combined tax burden routinely runs into seven figures. For that seller, the 1031 is not a clever tactic. It is the structural tool that preserves most of the equity for redeployment. Skipping the 1031 in this scenario is often a seven-figure decision made without modeling the alternative.
A seller with a shorter holding period, a smaller basis-to-price gap, or a genuine need to liquidate — estate liquidity, retirement income, family situation — is often worse off doing a 1031. The reasons are specific:
A forced 1031 compresses the replacement search into 45 days. Replacement decisions made under that clock are measurably worse than decisions made without it. The seller who "had to do a 1031" sometimes ends up owning a worse property than the one sold, at a worse price, with a worse hold profile. Boot — trade-downs, cash retained, debt reduction — converts the 1031 back into a partial taxable sale anyway. A 1031 that ends with material boot often produces the same tax as a straight sale, minus the time and cost of running the exchange. Out-of-state replacement into net-lease retail or DST structures carries its own risks — credit quality of the tenant, liquidity of the secondary market, governance of the DST sponsor. Replacements chosen for tax reasons, not investment reasons, tend to underperform.
Most LA multifamily sellers do not fall clearly into either case. Basis is substantial but not extreme. Tax exposure is real but not catastrophic. The seller has income, estate, or portfolio reasons pulling in different directions. For these sellers, the question is not "1031 or not" — it is whether the specific replacement property available today is worth holding. If a clean, appropriately-priced replacement exists, the 1031 adds value. If the replacement pool is thin, the 1031 is a structural headache being solved for a tax problem that could be absorbed. The honest discipline is to identify the replacement before committing to the exchange. Not after.
Straight sale costs: federal capital gains, California state tax, depreciation recapture, Measure ULA if applicable in LA City, standard transaction costs.
1031 costs: qualified intermediary fees, replacement due diligence costs, replacement acquisition costs, the opportunity cost of the capital during the 180-day window, and the embedded risk that a forced replacement is the wrong replacement. The straight sale cost is explicit and one-time. The 1031 cost is distributed and includes a structural risk that does not appear on a fee estimate.
The 1031 question is not a tax question first. It is a replacement property question. If the seller has a specific, well-priced replacement target or a clear deployment plan, the 1031 works. If the seller does not, running a 1031 because "that's what you do" often produces worse outcomes than paying the tax and reinvesting on a timeline that permits clean decisions.
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Michael Sterman is Senior Managing Director Investments at Marcus & Millichap.
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