Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free.
With values increasing so quickly one of the challenges to selling an investment property in Redondo Beach is the capital gains tax that a seller is required to pay after the sale. Unlike selling your primary residence with a $250,000 capital gains exemption (or $500,000 for married couple) there is no exemption when selling an investment property. One solution may be to “defer” these taxes with a 1031 exhange.
In a 1031 exchange you can reinvest all of the proceeds from the sale of an investment property and defer paying the taxes which kees 100% of the capital working.
If you choose to go down in value or choose to pull some equity out, an exchange is still possible but you will have tax exposure on the reduction. The value and equity numbers are net after paying “normal transactional costs.
See the Rules of a 1031 Exchange
See an overview of a 1031 Exchange
See the 1031 Exchange timeline