Selling a commercial or multifamily property in California with the goal of reinvestment? Whether you’re aiming to scale up your portfolio, transition to an investment that is less management-intensive, or simply refine your returns, entering a 1031 exchange allows you to strategically enhance your wealth while deferring taxation until your goals change in the future.

That said, if you have never sold an investment property before, making sense of capital gains tax and 1031 exchanges can prove challenging. As Los Angeles’ top commercial and multifamily real estate advisors, we’re here to help you understand your options.

Keep reading for an advice-packed overview of how a 1031 exchange works and how you can make the most of it as an investor.

Searching for personalized guidance on your 1031 exchange? Book a consultation with our team.

What is Capital Gains Tax?

Owning a piece of commercial or multifamily real estate allows you to steadily build equity while collecting passive income in the short term. When you eventually sell your property, that equity becomes subject to capital gains taxation.

Capital gains refers to the difference between your initial investment cost and the gross return of your sale. Let’s say you bought a property for $1,000,000 and sold it for $3,000,000; your total capital gains would be $2,000,000.

Rather than being taxed on the $2,000,000 right away, you have the opportunity to defer your exposure until you liquidate that equity from real estate down the road. This is done by entering into a 1031 exchange.

1031 Exchange Basics

Speaking broadly, there are two paths you can take as an investor following the sale of your property. You can either A, hold onto your returns for the purposes of retirement or other ventures beyond the scope of real estate or B, use the proceeds to purchase another property.

When pursuing the latter option, there are opportunities to delay the payment of capital gains and recapture the depreciation tax benefit. Enter the 1031 exchange, a common and effective strategy among commercial and multifamily investors in California.

A 1031 exchange is a federal regulation that allows you to shield your property sale returns from capital gains taxation if you immediately reinvest in another property. In other words, the government treats your transactions as a trade (or exchange) rather than a standalone sale.

Note that leveraging this benefit requires strict adherence to a specific process. Attempting to cut corners or deviate from your required steps could lead to disqualification and costly financial penalties.

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Key Terminology: Downleg vs Upleg

With a 1031 exchange, there are two key terms you should know: downleg and upleg.

Your downleg property is the building that you currently own and will be selling. The upleg property is the future investment that you will be trading into.

The 1031 Exchange Timeline at a Glance

Timeline is an important variable of a 1031 exchange. Understanding key dates and deadlines ahead of your sale and reinvestment can make the process smoother and more efficient. There are also strict timeframes that you must abide by from a regulatory perspective at certain points in your transition.

Commercial real estate transactions take time. From downleg to upleg, the entire process can take north of 300 days in total.

Here is a look at your approximate 1031 exchange timeline from a bird’s-eye view.

Selling Your Downleg Property

Your 1031 exchange begins with the sale of your current property. While the timeline on this stage is less strict, managing an efficient, well-timed sale will make your transition smoother and more efficient.

First 30 to 60 Days

• Your commercial or multifamily property is listed and marketed to target buyers.

Day 60 to Closing

• Offer is accepted.
• Books and physical contingencies removed.
• Loan contingencies removed.

30 Days Before Closing

• Upleg criteria are defined.
• Top upleg options are presented.

Purchasing an Upleg Property

Once the sale of your downleg property has closed, the timeline on your 1031 exchange tightens. From this point on, you have a window of 180 days to source, purchase, and close on your upleg property with checkpoints along the way.

Downleg Closing to Day 45

• Designate 1 to 3 potential exchange properties.

Day 45 to Day 180

• Best upleg opportunities are confirmed.
• Offer(s) are placed.
• The closing process begins.
• Upleg transaction closes.

Explore our signature case studies to learn more about our process and the results we’ve achieved for our clients.

Proactive Support Goes a Long Way

Navigating both a sale and a new investment on a limited timeline can present challenges. That’s why choosing the right professional support is essential.

At the Neema Group, our industry-leading expertise includes an advanced specialization in 1031 exchanges. Our results-forward, personalized approach helps you create and preserve wealth while minimizing risk, whatever your specific goals may be.

Beyond ensuring a seamless transition from one investment to the next, our advanced marketing and selling strategies help you garner the highest possible return on your downleg investment.

Further, we proactively identify top upleg opportunities well in advance of downleg closing. Our in-depth sourcing strategies are elevated by our partnership with Marcus & Millichap, granting clients access to exclusive off-market opportunities not found elsewhere.

Need multifamily real estate support? Call (213) 797-2290 or email us at neema@marcusmillichap.com to reach our team of experts.