1031 Exchange

1031 Exchange Process

A 1031 exchange is a swap of one investment property for another that allows capital gains taxes to be deferred. Using a 1031 exchange, you can reinvest all proceeds from the sale of your investment property and defer paying all those taxes. If you sell your investment property without completing a 1031 exchange, your taxes could exceed 20-35% of the capital gain.

The Traditional Way

The Smart Way - 1031 Exchange

General Rules of a 1031 Exchange

In a 1031 exchange, the replacement property must be like-kind to the relinquished property. The good news is that, in general, any real estate held for investment or business purposes in the US is considered like-kind; the difference in type, grade, or quality doesn’t matter. For example, you can exchange your multifamily rental property for a larger apartment building, or exchange it into a commercial property instead.

Properties Must Be “Like-Kind”

The two major exceptions in a 1031 exchange are your personal residence and vacation home. These aren’t considered to be of like-kind to any real estate held for investment or business purposes and therefore, cannot be used in a 1031 exchange.

All Proceeds Must be Reinvested

To avoid paying any capital gains taxes, you need to reinvest all of the proceeds from the sale of your investment property. In other words, the value of the replacement property must be equal to or greater than the value of the relinquished property in order to defer paying any capital gains taxes.

Titles Must be Identical

The ownership entity on title for the replacement property must be identical to ownership entity on title for the relinquished property.

1031 Exchange Overview

Property Identification Rules

There are a few rules to be aware of when considering a 1031 Exchange.

3-Property Rule

You can identify up to three replacement properties and complete your exchange by purchasing one or all of them, regardless of their total value.

200% Rule

You can identify more than three replacement properties and purchase as many of them as you’d like, so long as their total value doesn’t exceed 200% of the value of your relinquished property.

95% Rule

If neither of the other two rules fit your needs, you can also identify any number of replacement properties regardless of their total value, as long as you purchase 95% of the total value of all the properties identified.

1031 Exchange Timeline

From the day you close escrow on the sale of your investment property with Lyon Stahl, you start the clock on your 1031 exchange timeline. You now have 45 calendar days to identify a possible replacement property and 180 calendar days to close escrow on it. Make sure you don’t miss these deadlines, because the IRS is very strict.

Sell Property


Find Replacement


Buy Replacement


Benefitting Your Heirs

Pass It On

You can continue deferring your capital gains taxes using the 1031 exchange process until it’s time to pass your assets on to your heirs. When that happens, the basis by which the capital gains are determined steps up to the current market value. When your heirs go to sell the property for its current value, no capital gains would be recognized.

11626 Cedar Ave, Hawthorne

Client Goals: We helped our client successfully sell his 12 Unit Apartment building in Inglewood with the intent to exchange into several other properties to diversify his holdings and increase cash flow. Why Lyon | Stahl: The purchaser of 11626 Cedar Ave was a long term client who has completed several transactions with Lyon | Stahl. During the escrow period of his down leg we were already on the hunt for his exchange options giving him more time to identify his exchange properties. Process: To fulfill his exchange, our client needed to purchase approximately $3,200,000 worth of real estate. To satisfy this he decided to purchase 3 properties. 11626 Cedar Ave was a competitive listing with multiple offers, but due to Lyon Stahl’s good relationship with the listing broker and the buyer being in an exchange we were able to secure the deal for him. Results: As a result of our good broker relationships and the buyer coming out of an exchange we were able to secure the deal by writing an all cash offer with no loan or appraisal contingencies and a quick close of escrow.

315 W Palm Ave, El Segundo

Client Goals: Client was an owner/user of a duplex for over 40 years. She had recently retired and always had the goal of retiring and moving to northern California. Why Lyon | Stahl: The seller has been meeting with Lyon Stahl for updated valuations for several years. Upon her retirement she gave Lyon Stahl a call letting us know that she was ready to sell and perform a 1031 exchange into northern California. Process: Once the listing agreement was signed our team jumped into action with our full scale marketing campaign which includes a direct mail campaign, email blasts targeting owners and investors, drone footage, and cold calling through all income property owners in the immediate area. Throughout the listing period we held several walk-throughs of the units allowing buyers to see the layouts as this was an ideal purchase for an owner user. Due to the owner living at the property and needing to perform a 1031 exchange, we had specific terms that the seller required. The terms allowed for the seller to have two 30 day options to extend the close of escrow and also for the seller to have an optional two month lease back at no cost. Results: During the listing period we received three offers and countered each one with the sellers required terms. As a result we were able to go under contract at the sellers asking price with all of her required terms. The seller was able to successfully close on her El Segundo property and purchase her dream home in northern California.

Triple Net – 1147 11th St, Manhattan Beach

Client Goals: Owner actively managed her 4-unit property in Manhattan Beach; she was hoping to sell so that she could alleviate the management burden associated with her multifamily property. The Seller originally wanted to cash out, but after learning of high capital gain tax consequences, she agreed a 1031 Exchange was her best option. Why Lyon Stahl: Our client was reluctant to exchange due to her concerns with identifying and closing on an upleg within the narrow time deadlines. We walked her through our proactive and multi-faceted approach to the exchange process but she was still opposed to the idea of managing another property. We discussed the potential benefits of a Net Leased Investment for her unique situation; exchanging into this type of deal would allow her to avoid paying capital gain taxes and forgo any landlord responsibilities. She ultimately chose to work with Lyon | Stahl due to our expertise in the 1031 exchange process and large inventory of Triple Net Investment Opportunities. Process: Our client had specific criteria for the ideal Triple Net Investment – the tenant had to be a credit-worthy national retailer with a corporate guaranteed lease. While in escrow with her 4-unit building, we wrote several competitive offers on NNN deals that aligned with our client’s buy-side specifications and investment goals. Outcome: Successfully exchanged into a Del Taco in Moreno Valley, CA. This management-free investment was an absolute NNN deal with all expenses paid by the tenant and no landlord responsibilities. The lease was corporate guaranteed and included scheduled increases to hedge against inflation and ensure steady NOI growth.

More Cash Flow – 247 W 12th St, San Pedro & 1565 W 207th St, Torrance (Lo)

Client Goals: Sell both 4-unit buildings and exchange into one larger property with better cash flow. Why Lyon Stahl: The Sellers were concerned with the 1031 Exchange deadlines and originally wanted to identify their Upleg before listing both buildings on the MLS, LoopNet and CoStar. After receiving little traction working with agents at other firms, we advised them to list their multi family properties first in order to maximize leverage when the right deal became available. Process: We included (3) 30-day extension options in the contract to allow seller sufficient time to identify and secure replacement property. Our entire team actively searched for suitable upleg opportunities, combining all available deals on and off the market. Outcome: A Senior Agent at Lyon|Stahl was able to find a buyer for both deals that was willing to accommodate the Seller’s extension requests. The Upleg was an off-market deal presented by another Lyon|Stahl Senior Agent. The Seller successfully exchanged into a 12-unit building in Torrance that generated three times the income of the relinquished properties.

Better Area – 3729 W 132 nd St and 4175 W Broadway, Hawthorne (Gilmore)

Client Goals: The owner approached us seeking to sell both income properties in Hawthorne and exchange into a larger building in a better area. She had a strong preference for a value-add replacement property with upside market rent potential. Why Lyon | Stahl: Our specialization and proven success in the 1031 Exchange process stems from our ability to develop creative solutions that enable us to identify and close on ideal replacement properties for our clients. Process: We utilized our team-approach in order to combine all available off-market upleg opportunities that would fit our client’s investment goals. In addition, we included several extension options in the purchase contract to ensure sufficient time in meeting the exchange deadlines. Outcome: The Seller exchanged into a 6-unit building in an excellent area of Los Angeles with a market CAP of 5% and GRM of 12. Four of the units were delivered vacant, allowing our client to immediately make the necessary capital improvements to maximize the return on their investment.

Case Study

Client Goals: The seller wanted to exchange out of Venice and into Redondo Beach because they were tired of dealing with rent control. Why Lyon | Stahl: The seller chose Lyon | Stahl because of our proven track record and our ability to set market records. On the same street of the subject property, Lyon | Stahl had sold three similar properties in the past year. Process: We utilized our aggressive marketing strategy to generate as much activity as possible. Our marketing included a direct mail campaign, email blasts targeting owners and investors, drone footage, and cold calling through all income property owners in Venice. During the listing process we were also able to find our clients a triplex in Redondo Beach that they fell in love with. The triplex was priced extremely competitively with multiple offers on the property. Due to our aggressive marketing we were able to get the sellers an all cash offer with a quick close. Results: Our efforts in getting an offer with favorable terms for the sellers allowed them to write an extremely competitive offer on the property they fell in love with in Redondo Beach. Seller’s were able to move on from a rent control property and purchase something closer to their primary residence in the south bay.

Case Study

Client Goals: The client was performing a 1031 exchange and identified 218 Stepney St as their up-leg property. The client’s goal was to exchange out of the beach cities into Inglewood where they could obtain more units and see better cash flow. Why Lyon | Stahl: During the escrow of our clients down leg we were able to successfully find them a replacement property that fit their investment goals. Process: Once the listing agreement was signed for the clients down leg property, we began showing them up-leg options in Inglewood. Due to our proactive search campaign, we were able to go under contract on the up-leg right as the down-leg property went non-contingent. Results: The client was successfully able to exchange from a duplex in Redondo Beach into a 7 unit property in Inglewood which produced significantly more income.