If you’re selling one investment property and buying another, a 1031 exchange can defer the capital gains tax on the sale, but only if you follow the timeline exactly.
What a 1031 Exchange Does
Named for IRS Section 1031, a 1031 exchange lets an investor sell one investment or business-use property and reinvest the proceeds into another “like-kind” property, deferring capital gains tax on the sale rather than paying it immediately. It doesn’t eliminate the tax, it defers it, so the basis and the deferred gain carry forward into the new property.
For an LA investor sitting on a property that’s appreciated significantly over years of holding, that deferral can be the difference between actually being able to trade up into a bigger or better-positioned property and losing a large chunk of the proceeds to taxes before you even start shopping for the next deal.
The Deadlines That Actually Matter
Two deadlines run the whole process, and both are strict. You have 45 days from your sale closing to identify a replacement property. Then you have 180 days total from that same closing date to actually close on the replacement. There’s no flexibility built into either number, and missing one disqualifies the exchange entirely, turning the deferred gain into a taxable one.
In a market like LA, where a desirable property can go under contract within days of listing, 45 days to identify a replacement goes by faster than it sounds. Investors who wait until after their sale closes to start looking at replacement options are working against a much tighter window than those who start scouting properties while their existing sale is still in escrow.
Why You Can’t Touch the Proceeds
The sale proceeds have to pass through a qualified intermediary the entire time. You can’t personally receive or hold the funds at any point between the sale and the purchase, even briefly, or the exchange gets disqualified. This is one of the most common ways investors accidentally blow up an otherwise valid exchange, usually by not setting up the intermediary relationship before the first sale closes.
What Counts as “Like-Kind” for Real Estate
The like-kind requirement is broader for real estate than a lot of investors expect. It doesn’t need to be the same type of property. An LA duplex can be exchanged for a single retail property somewhere else, for example, and the exchange still qualifies. What matters is that both properties are held for investment or business use, not that they’re the same category of asset. What doesn’t qualify is a primary residence on either end of the exchange.
That flexibility opens up options a lot of investors don’t consider at first. Someone exchanging out of a small LA multi-family property isn’t limited to buying another multi-family building. They could move into a commercial property, a different residential rental type, or a property in an entirely different state, as long as it’s held for investment or business use on the other side.
The Measure ULA Wrinkle for LA Sellers
If you’re selling investment property inside LA city limits and the price crosses Measure ULA’s thresholds, know that a 1031 exchange won’t help you there. Measure ULA is a transfer tax, not a capital gains tax, so there’s no exchange structure that defers it. That tax is due at closing regardless of whether you’re rolling the proceeds into a new property. If you want the full breakdown of how Measure ULA works, see our guide to the LA mansion tax.
Before You Start the Clock
The 45 and 180-day deadlines start running the moment your sale closes, so the planning needs to happen before that date, not after. Work with a qualified intermediary and a tax professional before you list the property you’re selling, not once you’re already inside the exchange window. Getting the structure right from day one is what makes the deferral actually hold up.
If you’re planning a sale and considering a 1031 exchange into a new LA property, get in touch and Efrat can help you think through timing on the real estate side while your tax team handles the exchange structure.
