What's the difference between a 1031 exchange and a regular sale?

Regular sale: - You sell investment property and receive proceeds. - Federal capital gains tax (15-20% depending on income) due on the gain. - California capital gains tax (~9.3%) due on the same gain. - Depreciation recapture (25% federal) due on accumulated depreciation. - Plus possible 3.8% Medicare surtax on investment income.

Total tax on a $500K gain could be 30-40%+ — meaningful enough that it changes investor behavior.

1031 exchange: - You sell investment property and direct the proceeds through a Qualified Intermediary (QI). - Within 45 days of selling, you must identify replacement property in writing. - Within 180 days of selling, you must close on the replacement property. - Replacement property must be "like-kind" investment property (real estate for real estate, broadly defined). - Equal or greater value in the replacement property defers the entire gain.

Critical rules: - You cannot touch the cash between sales — it must go through a QI. - Primary residences don't qualify for 1031. - Identification of replacement property is binding and time-sensitive. - California has clawback rules if you 1031 from CA to another state.

When 1031 makes sense: - You want to upgrade from a single-family rental to a multifamily building. - You want to consolidate multiple properties into one larger one. - You want to swap geographic locations. - You want to defer tax until death (when stepped-up basis can eliminate the gain entirely).

Work with both a CPA and a real estate attorney before doing a 1031 — the strict rules make DIY risky.

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