Thinking about selling your Alhambra duplex or fourplex but worried about a big tax bill? You are not alone. Many small multifamily owners in 91801 use a 1031 exchange to defer capital gains and keep more capital working. In this guide, you will learn the core rules, 45 and 180 day deadlines, how to avoid common mistakes, and practical replacement strategies that fit the Los Angeles market. Let’s dive in.
What a 1031 exchange does
A 1031 exchange lets you defer recognition of capital gains and depreciation recapture when you sell investment real estate and buy other investment real estate. The key is that you must swap into “like‑kind” real property and follow strict timelines. Deferral is not elimination. You will generally owe tax when you eventually sell outside of 1031.
Since 2017, only real property qualifies for 1031 treatment. Personal property and partnership interests do not qualify. Your property must be held for investment or for use in a trade or business, not primarily for resale.
Like‑kind rules, simplified
For real estate, like‑kind is broad. You can exchange a small multifamily for many types of U.S. investment real property, such as larger apartments, industrial, or land. Both the sold and purchased properties must be U.S. real property held for investment or business use. Foreign real estate does not qualify as like‑kind to U.S. property.
The 45 and 180 day timelines
You face two firm deadlines that start the day you close on the sale of your relinquished property:
- You have 45 days to identify replacement properties in writing.
- You must close on replacement property within 180 days or by your tax return due date for that year, whichever is earlier.
These are hard deadlines. Missing either generally disqualifies the exchange.
Identification rules you can use
You must identify replacement properties in writing to your Qualified Intermediary and be unambiguous. You can choose among three frameworks:
- Three‑property rule: Identify up to three properties, any value.
- 200% rule: Identify any number of properties if their total value does not exceed 200% of what you sold.
- 95% rule: If you identify more than allowed above, the exchange can still qualify if you acquire at least 95% of the total identified value within 180 days.
Use your QI’s template and delivery method so your identification is timely and clear.
Key parties and paperwork
A Qualified Intermediary, also called an accommodator, holds your sale proceeds and prepares exchange documents. This prevents you from having constructive receipt of cash. The QI must be independent from you and related parties. Poor handling of funds is a common reason exchanges fail.
You also need to file Form 8824 with your federal tax return for the year of the exchange. Keep all contracts, QI statements, identification notices, and closing documents for your tax preparer.
Avoiding taxable boot
Any cash you receive or value that is not like‑kind real property is taxable boot. A common example is mortgage boot. If your replacement property carries less debt than your sold property, the net debt reduction is taxable to the extent of that difference.
Ways to reduce boot exposure:
- Match or increase your debt on the replacement property.
- Add fresh cash to the purchase if you are reducing debt.
- Coordinate carefully if bringing in co‑investors.
Keep the same taxpayer
The taxpayer who sells must be the same taxpayer who buys. If your duplex is owned in your name through a single‑member LLC that is disregarded for tax purposes, you can generally continue in your name. If a partnership or multi‑member LLC sells, that same entity typically must acquire the replacement. Plan title and entity details with your CPA and attorney before you list.
Replacement strategies for Alhambra small‑multi owners
Trade up to larger multifamily
Many owners exchange a duplex or fourplex into a larger 6 to 12 unit building. You may gain economies of scale and potentially improve net operating income. Underwrite rent rolls, maintenance, and your management plan carefully.
Consolidate for simplicity
If you own several small properties, you can sell them and consolidate into one or two larger assets to reduce hands‑on management. The three‑property identification rule can help when you want to target a limited number of higher‑value replacements.
Diversify by area or type
You can use 1031 to move capital into other Los Angeles neighborhoods or other U.S. markets. You can also shift from apartments to industrial or retail, as long as the property is U.S. real property held for investment or business. Factor in different local rent and tenant rules when you underwrite.
Go passive with DST or TIC
If you want to be more passive, some investors use Delaware Statutory Trusts or Tenancy in Common interests as replacement property. These structures can provide fractional ownership in larger assets. Review offering documents and understand liquidity, fees, and lender requirements before you choose this route.
Reverse or improvement exchanges
If the ideal replacement appears before you can sell, a reverse exchange can let you park title with a specialized titleholder while you complete the sale. If you want to renovate as part of the exchange, an improvement exchange can deploy exchange funds into construction. Both structures are more complex and require strict compliance and experienced advisors.
Partial exchanges and cash out
You can take some cash, but you will owe tax on the boot you receive. Some investors accept partial tax now to meet other goals, while still deferring a portion via 1031.
California and Los Angeles details to know
California’s top personal income tax rate can reach about 13.3%. At the federal level, the top long‑term capital gains rate is 20%, and the 3.8% net investment income tax may also apply. Combined top rates can approach about 37% for some taxpayers. A successful 1031 exchange generally defers both federal and California state income tax. Confirm your situation with a California CPA.
Property tax reassessment basics
A 1031 exchange does not preserve your former property tax base under Prop 13. When you buy a replacement property, Los Angeles County will generally reassess it at the purchase value. Contact the Los Angeles County Assessor to understand change‑of‑ownership rules, timing, and projected taxes on the replacement property.
Rent and local rules
Cities in the Los Angeles area have rent and tenant protection rules that affect operations. When you evaluate replacement properties, review the local rent regulations, eviction protections, and just‑cause requirements that apply in that jurisdiction.
Entity and title planning
Many owners hold property in LLCs for liability reasons. Because of the same‑taxpayer rule, coordinate entity and title well before closing. Transfers into or out of partnerships or corporations during an exchange can cause tax issues.
Step‑by‑step checklist
- Confirm your property is held for investment or business use.
- Consult a CPA and a real estate attorney with 1031 experience before you list.
- Line up a reputable, independent Qualified Intermediary before your sale closes.
- Ensure sale proceeds go directly to the QI to avoid constructive receipt.
- Plan entity and title so the selling and buying taxpayer match.
- Identify replacement property in writing within 45 days using the QI’s format.
- Use the three‑property, 200% rule, or 95% rule to structure your identification list.
- Close on replacement property within 180 days.
- Replace debt or add cash to avoid mortgage boot if full deferral is your goal.
- Keep all exchange documents and file Form 8824 with your tax return.
- Ask the Los Angeles County Assessor about reassessment and expected property taxes.
- Consider reverse or improvement structures if timing or renovation is critical, and budget for added costs.
A simple example
You sell a fourplex in Alhambra for $1,000,000 with a $400,000 mortgage. You identify an eight‑unit building for $1,200,000 within 45 days and close by day 180. To achieve full deferral, you replace your equity and match or increase your debt through a new loan or added cash. If you bought a lower‑priced property and took cash out or lowered your net debt, that amount would generally be taxable boot.
Work with a local team
Executing a clean 1031 exchange in 91801 is all about planning, timing, and the right lineup of professionals. Your CPA and attorney guide the tax and legal structure. A strong local brokerage team finds the right replacement, manages milestones, and coordinates with your QI so you stay on track. If you are planning a sale or hunting for a replacement, connect with the local experts at Joy Realty Group to talk strategy and shortlist properties that fit your goals.
FAQs
What is a 1031 exchange for investment property?
- It is a federal tax rule that lets you defer capital gains and depreciation recapture when you sell U.S. investment real estate and buy other like‑kind U.S. investment real estate within strict timelines.
How do the 45 and 180 day deadlines work?
- You must identify replacement property in writing within 45 days of your sale and close on qualified replacement property within 180 days, or earlier if your tax return is due sooner.
What counts as like‑kind real estate in the U.S.?
- Nearly all U.S. real property held for investment or business use is like‑kind to other U.S. investment real property, such as multifamily for industrial or land for apartments.
What is boot in a 1031 exchange?
- Boot is any non‑like‑kind value you receive, such as cash or net debt reduction, and it is generally taxable to the extent received.
Does a 1031 exchange avoid Los Angeles County property tax reassessment?
- No. Property tax reassessment is separate. Your replacement property is generally reassessed at its purchase value by the county assessor.
Can I exchange into property outside California?
- Yes. You can acquire replacement property anywhere in the U.S., subject to 1031 rules. Be mindful of different state tax and property management requirements.
Do I need a Qualified Intermediary to do a 1031?
- Yes. A QI must hold your sale proceeds and handle exchange documents so you do not have constructive receipt of cash.
Who should be on title for the replacement property?
- The same taxpayer who sold must acquire the replacement. Plan entity and title with your CPA and attorney before you list or go under contract.
