1031 Exchange Los Angeles: Complete Guide for Apartment Building Owners
By Cameron Samimi, Executive Vice President of Investment Sales at Lyon Stahl Investment Real Estate · Updated April 2026
Section 1031 of the Internal Revenue Code allows real estate investors to defer capital gains taxes by exchanging one investment property for another of "like-kind." For Los Angeles apartment building owners, a well-executed 1031 exchange can defer $200,000 to $1,000,000+ in combined federal and California state taxes — capital that stays invested and compounds over time.
However, 1031 exchanges are governed by strict deadlines, complex rules, and California-specific provisions that can trip up even experienced investors. This guide covers everything LA apartment owners need to know, based on my experience facilitating exchanges across 334+ multifamily transactions totaling $446M+ in sales volume.
How a 1031 Exchange Works
At its core, a 1031 exchange involves four steps:
- Sell your current property (the "relinquished property") and direct proceeds to a Qualified Intermediary (QI) — you cannot touch the funds.
- Identify replacement properties within 45 calendar days of closing.
- Close on the replacement property within 180 calendar days of closing the relinquished property.
- File IRS Form 8824 with your tax return for the year of the exchange.
The key requirement is that both the relinquished and replacement properties must be held for investment or business use — personal residences do not qualify. Both properties must be "like-kind," which in real estate is broadly defined: you can exchange an apartment building for a retail center, industrial building, or even vacant land.
Critical Deadlines
These deadlines are absolute. They cannot be extended for weekends, holidays, or personal circumstances. The only exception is a presidentially declared disaster in your area. Missing either deadline collapses the entire exchange, triggering immediate tax liability.
Pro tip: Begin your replacement property search before closing the sale. In LA's competitive multifamily market, waiting until the 45-day clock starts can leave you scrambling. I help clients build a pipeline of potential acquisitions during the listing and escrow period, so they're ready to identify properties on Day 1.
California-Specific Rules
California adds several layers of complexity to 1031 exchanges that don't exist at the federal level:
- FTB Form 3840 (Annual tracking): If you exchange California property for out-of-state property, you must file Form 3840 every year to report the deferred gain. California will eventually collect its tax when you sell the replacement property — even if you've moved out of state.
- Form 593 (Withholding): California requires 3.33% withholding on the sale of real property by non-residents or entities. In a 1031 exchange, you can claim exemption using Form 593-C, but it must be properly completed and submitted to the title company.
- California capital gains rate: Up to 13.3% — the highest in the nation. Combined with federal taxes, LA apartment owners can face a combined marginal rate exceeding 37% on real estate gains, making 1031 exchanges especially valuable in California.
- Multi-state exchanges: If you exchange a California property for one in another state, you must track and report the gain to California indefinitely. This "claw-back" provision is unique to states like California and New York.
1031 Exchange Strategies for LA Apartment Owners
Strategy 1: Consolidate Up
Sell multiple smaller buildings and exchange into one larger asset. A common move for LA investors selling 4-plexes and 8-plexes to acquire a 20-40 unit building, reducing management burden while increasing cash flow.
Strategy 2: Trade RSO for Non-RSO
Exchange an RSO building in the City of LA for a non-RSO property in an adjacent city (Inglewood, Torrance, Long Beach) or a newer-construction asset exempt from rent control. This eliminates regulatory constraints while maintaining LA market exposure.
Strategy 3: Move from LA to Higher-Yield Markets
Some LA owners exchange into higher-cap-rate markets (Las Vegas, Phoenix, Dallas) for better cash-on-cash returns. However, be aware of California's FTB Form 3840 tracking requirement — the state will eventually collect its tax.
Strategy 4: Reverse Exchange
Buy the replacement property first, then sell the relinquished property within 180 days. Essential in LA's competitive market where great deals don't wait. Reverse exchanges cost more ($15,000–$25,000 in additional QI and parking fees) but ensure you don't lose your target acquisition. Learn more about current acquisition opportunities on our Buy With Us page.
Potential Tax Savings on a $3M Apartment Sale
Frequently Asked Questions
Can I do a 1031 exchange on an apartment building in California?
Yes. 1031 exchanges apply to all investment real estate in California, including apartment buildings, commercial properties, and mixed-use assets. However, California has a unique requirement: Form 593 must be filed, and if you exchange into a property outside California, the state may require withholding or track the deferred gain through FTB Form 3840. Cameron Samimi at Samimi CRE Advisors has facilitated hundreds of 1031 exchanges for LA apartment owners and can coordinate the process with your qualified intermediary and tax advisor.
What are the 1031 exchange deadlines?
There are two critical deadlines in a 1031 exchange: (1) the 45-Day Identification Period — you must identify up to three replacement properties within 45 calendar days of closing the relinquished property, and (2) the 180-Day Exchange Period — you must close on the replacement property within 180 calendar days. These deadlines are absolute and cannot be extended (except in federally declared disaster areas). Starting your replacement property search before closing the sale is strongly recommended.
How much does a 1031 exchange save in taxes?
A 1031 exchange defers both federal capital gains tax (up to 20%) and California state capital gains tax (up to 13.3%), plus the 3.8% Net Investment Income Tax (NIIT) and depreciation recapture (25%). On a $3M apartment building with $1M in capital gains, the combined tax savings can exceed $500,000. The gain is deferred indefinitely and can be eliminated entirely through a step-up in basis at death.
What is a reverse 1031 exchange and when should I use one?
In a reverse 1031 exchange, you acquire the replacement property before selling the relinquished property. This is useful in competitive markets like Los Angeles where desirable multifamily properties sell quickly. Reverse exchanges are more complex and expensive ($15,000–$25,000 in additional fees) but prevent you from losing your ideal replacement property. Cameron Samimi regularly helps clients structure reverse exchanges when timing is critical.
What are common 1031 exchange mistakes to avoid?
The most common 1031 exchange mistakes for LA apartment owners include: (1) missing the 45-day identification deadline, (2) receiving 'boot' (cash or debt reduction that creates taxable gain), (3) not matching the title — the same taxpayer entity must be on both the relinquished and replacement property, (4) underestimating California's clawback provisions when exchanging out of state, and (5) failing to replace both the equity and the debt from the relinquished property. Working with an experienced multifamily broker ensures proper structuring from day one.
Related Guides
Planning a 1031 Exchange?
Whether you're selling an LA apartment building and need to identify replacement properties, or you've found an acquisition and need to sell your current asset, we can coordinate the entire exchange process.