1031 Exchanges in Orange County and Long Beach

What a 1031 Exchange Does

Section 1031 of the tax code lets you sell real estate held for investment or business use and put off paying capital gains tax on the sale, as long as you reinvest the proceeds in other investment real estate. The tax is not forgiven. It carries forward into the new property, and many investors exchange more than once as they trade up over the years.

The rules are strict and the deadlines do not bend. Neither one moves for a weekend, a holiday, or a slow lender. That is why the real estate side of an exchange needs as much planning as the tax side.

The Rules That Decide Whether It Works

• What qualifies. Real estate held for investment or business use, exchanged for other real estate held the same way. A Long Beach fourplex can become a Newport Beach duplex, a commercial building, or land. Your primary home and properties bought to flip do not qualify.
• Identifying properties. Most investors name up to three possible replacements of any value. You can name more, as long as their combined value stays within twice the price of what you sold.
• Value and equity. To defer all of the tax, the replacement generally needs to cost at least as much as what you sold, all of your net proceeds need to go into it, and any loan you paid off needs to be replaced with a new loan or added cash.
• Boot. Cash you keep, or debt you do not replace, is called boot and is taxed in the year of the exchange.
• Who holds the money. A qualified intermediary holds the sale proceeds for the entire exchange. You cannot receive or control them at any point.

California’s Rule for Out-of-State Exchanges

If you sell California property and buy your replacement in another state, California keeps track of the gain you deferred. You file Form 3840 with the Franchise Tax Board for the year of the exchange and every year after, until the gain is eventually taxed. When you later sell the out-of-state property in a taxable sale, California collects tax on the gain from the original California property. Skipping the yearly filing can lead the state to assess that tax early.

Reverse 1031 Exchanges: Buying Before You Sell

On this coast, the right replacement property often comes along before you are ready to sell, and it may not wait. A reverse exchange lets you buy it first and sell your current property afterward, while still deferring the tax.

• Someone else holds the title for a while. The rules do not let you own both properties at once, so an exchange accommodation titleholder, usually a company set up through your intermediary, takes title to one of them. Most often it buys the new property and leases it to you while you sell.
• The same deadlines, started earlier. The clock starts the day the titleholder takes title, not the day you sell. You have 45 days to identify which property you will sell, and 180 days to sell it and complete the exchange.
• It has to be set up before you buy. The titleholder must take title at the closing. If the new property is bought in your own name first, it is too late to make it a reverse exchange.
• Financing takes extra work. Many lenders are unfamiliar with reverse exchanges. The loan may need to be made to the titleholder, and you will usually guarantee it. Paying cash or using seller financing is simpler; with a loan, get your lender’s approval before you go into contract.
• It costs more. An extra entity, more documents, and more parties at the table mean fees typically run several thousand dollars above a standard exchange.

A related version, sometimes called an improvement or build-to-suit exchange, works the same way but lets you renovate or build on the replacement property while the titleholder holds it, so the cost of the work can count toward the value you reinvest.

In a reverse exchange the timing of the two transactions is everything. I write the purchase so the titleholder can take title at closing, then price and market your current property to sell well inside the 180 days. Your intermediary and CPA structure the exchange itself, and they should be involved before you make an offer.

Where I Come In

The 45-day window is the hardest part on this coast, where good investment property is scarce and often sells without a public listing. So we start looking before your sale closes, and I use my agent network to find properties that never reach the listing sites.

On the sale, I market your property, negotiate the terms, and coordinate the closing date with your intermediary and escrow, so the clock starts when you expect it to. On the purchase, I write offers with contingency periods and closing dates that fit inside your 180 days. Everything else about buying and selling income property is on the investment property page.

I am a real estate agent, not a CPA, attorney, or qualified intermediary. Your tax advisor should confirm the exchange works for your situation before you list, and I am glad to coordinate with them.

Get Early Notice of Replacement Properties

If an exchange is in your future, join the off-market list as an investor. Hearing about the right building before your sale closes is the easiest way to make the 45-day deadline.