If you own a Lomita rental and you are weighing a sale, a 1031 exchange can help you move equity into a better asset while deferring capital gains taxes. This playbook explains how to plan the exchange, meet key deadlines, and choose smart replacements in the South Bay.
Why 1031 Exchanges Benefit Lomita Owners
You likely have built up meaningful equity. A 1031 exchange lets you sell a rental and reinvest in another investment property without paying capital gains tax today. By deferring tax, you keep more working capital for your next purchase.
We will keep the guidance simple and practical. By the end, you will know the steps, the roles, the deadlines, and local cost factors so you can move from decision to closing with confidence.
1031 Exchange Basics for Owners
What a 1031 exchange can accomplish
A 1031 exchange lets you defer federal capital gains tax when you sell an investment property and buy another like-kind investment property. You can use it to:
- Trade up to a higher-quality or higher-income asset
- Consolidate multiple small properties into one easier asset
- Diversify into different property types or locations
- Shift from hands-on management to a more passive option
To keep the deferral, you must follow strict timing and process rules set by the IRS, including the 45-day identification and 180-day closing windows per IRS Form 8824 instructions.
Like-kind property and eligibility
“Like-kind” is broad for real estate. In general, investment or business real property exchanged for other investment or business real property qualifies. Personal-use homes and flips do not. Under current law, only real property qualifies for 1031 treatment at the federal level per IRS guidance.
California mostly follows the federal rules, but you must complete state reporting and follow withholding procedures when they apply per the Franchise Tax Board.
Key roles and moving parts
- Qualified intermediary (QI): Holds sale proceeds, prepares exchange paperwork, and helps you avoid constructive receipt.
- Escrow and title: Coordinate closings and recording.
- Lender: Preps underwriting so financing is ready within the 180-day window.
- CPA/tax attorney: Confirms tax treatment, entity structure, and state filings.
- Real estate advisor: Sources viable replacements early and manages timing across both transactions.
Using a QI is standard to preserve deferral and avoid receiving the funds directly per IRS instructions.
How tax deferral fits long-term goals
Deferral keeps more cash in play. That extra equity can improve cash flow, reduce your loan-to-value, and help you secure locations or property types that better match your risk and time horizon. Many Lomita owners use exchanges to reduce maintenance, improve tenant quality, or move closer to passive income later.
Step-by-Step Exchange Playbook
Define goals, metrics, and hold criteria
Clarify what “better” looks like before you list:
- Cash flow target and acceptable cap rate range
- Maintenance profile and desired management intensity
- Location, tenant base, and hold period
- Exit strategy and liquidity needs
Write these as simple rules so every candidate property is easy to score.
Assemble your exchange team early
Do this before you hit the market:
- Interview qualified intermediaries and compare fees, security of funds, and service scope. Typical basic deferred exchange fees often land in a modest range, with complex structures costing more see industry overviews.
- Loop in your CPA to confirm entity, basis, and state reporting needs, including California’s FTB Form 3840 tracking when you exchange into out-of-state property per FTB guidance.
- Get lender preapproval and surface any entity or title requirements that could affect closing speed.
- Align with your real estate advisor on both the sale plan and your replacement search.
Prep, list, and coordinate the sale
- Prepare property condition, disclosures, and rent rolls so buyers move quickly.
- Add exchange cooperation language in the contract. Execute the written exchange agreement with your QI before closing the sale to avoid constructive receipt per IRS rules.
- Set a realistic timeline that gives you time to identify and close on the replacement.
Plan your identification strategy
You have 45 calendar days from the sale to identify replacement properties and 180 days to close per IRS deadlines. Common approaches include:
- Primary pick plus two backups in the same submarket
- A mix of different property types to diversify execution risk
- A Delaware Statutory Trust (DST) allocation as a backup to fill any equity shortfall. DSTs can qualify for 1031 treatment, but they are typically passive and can be illiquid with structural limits see IRS Revenue Ruling 2004-86 and DST risk primers
Line up inspection windows and access in advance so you can complete diligence inside the timelines.
Secure financing and de-risk closings
- Submit a full loan package early; underwrite both base and stretch scenarios.
- Clarify any entity or title change issues to meet the same-taxpayer rule.
- Use seller communication to secure cooperation on timing and access.
- Keep a viable Plan B to avoid a blown 180-day close if your first choice slips.
Lomita Market Lens for Exchanges
Property types to consider locally
- Single-family rentals: Often stable tenants and simpler turnovers, but lower cap rates in many South Bay pockets.
- Small multifamily (2 to 4 units): Scales income and depreciation while keeping management hands-on but manageable.
- Townhomes and condos: Lower maintenance, HOA oversight, and potentially broad tenant demand. Review HOA rules and rental limits.
- Passive options: DST or tenancy-in-common interests can satisfy like-kind rules but require careful review of fees, liquidity, and sponsor strength see IRS and DST resources and industry risk guidance.
Finding opportunities on and off market
Competitive submarkets can move fast. Beyond the public portals, a local network can surface pocket and coming-soon options, quiet multiunit offerings, and owners open to exchange timeframes. This can be the difference between naming strong candidates inside 45 days and scrambling.
Aligning timing with local dynamics
Seasonality, school calendars, and local listing rhythms can influence buyer demand and lender queues. Align your sale launch and replacement search so your 45- and 180-day windows land in a period where you can tour, inspect, and close without delay.
Strategies, Pitfalls, and Risk Control
Upgrade, consolidate, or diversify
- Upgrade: Trade into a stronger location or newer asset to improve rent durability and reduce repairs.
- Consolidate: Move several small holdings into one property to reduce management and concentrate quality.
- Diversify: Split into different property types or geographies to spread risk and smooth cash flow.
Avoiding common exchange mistakes
- Missing the 45-day identification or 180-day closing deadlines. The IRS enforces both strictly per Form 8824 instructions.
- Taking constructive receipt of funds by skipping a QI per IRS rules.
- Receiving boot, such as cash back or debt reduction, which can trigger tax on that portion per IRS guidance.
- Related-party missteps. Exchanges with related parties carry special rules and a typical two-year holding expectation under Section 1031(f) see the statute text.
- Title or taxpayer mismatches. The entity selling should be the same entity taking title to the replacement.
Build contingencies and backups
- Identify more than one viable target and keep inspections moving in parallel.
- Use contract terms that allow reasonable access and timeline coordination.
- Maintain documentation that proves timely identification and exchange compliance.
California and Local Considerations That Affect Your Math
- State reporting and tracking: California generally conforms to federal 1031 rules but requires information reporting and tracks deferred California-source gain, especially if you exchange into out-of-state property per FTB.
- Withholding: For California real property, withholding rules may apply in exchanges when there is boot or a failed exchange. The QI typically handles remittance and Form 593 when required see Form 593 instructions.
- Property tax reset: A 1031 exchange defers income tax, not property tax. New acquisitions are generally reassessed under Prop 13 at the new base-year value, which can increase the property tax bill on your replacement see assessor guidance.
- Documentary transfer tax: Los Angeles County’s documentary transfer tax is generally $0.55 per $500 of consideration, collected at recording. Some cities add their own tax; Lomita is not listed among the additional-rate cities. Include this in your estimates per the County Registrar-Recorder.
Work With a South Bay 1031 Partner
How Davidson Group supports investors
- Upfront strategy: We clarify goals and run exchange math before you list.
- On- and off-market access: We surface targeted replacements across Lomita and the South Bay, including discreet opportunities.
- Coordinated execution: We align escrow, QI, lender, and seller timelines so identifications and closings stay on track.
- Risk control: We help structure backups, manage inspections, and protect your 45- and 180-day windows.
Request a complimentary home valuation and a tailored exchange plan with the Davidson Group - Bayside Real Estate. We will map scenarios, estimate net proceeds, and line up realistic replacement options.
What to bring to your first consult
- Your current property details: rents, expenses, loan terms, improvements
- Your goals: cash flow, location preferences, management profile, hold period
- Your financing context: credit, liquidity, targeted leverage
- Timing considerations: lease expirations, desired close window, travel constraints
Map Your Exchange With Local Guidance
A well-run 1031 exchange can preserve hard-earned equity, improve your portfolio, and simplify your life. With the right plan, team, and timelines, you can move from sale to stronger ownership without losing momentum to taxes or process risk.
Ready to explore your options? Request a complimentary home valuation and schedule a confidential consult with the Davidson Group - Bayside Real Estate.
FAQs
What are the key IRS deadlines I must meet?
- You have 45 days to identify replacement property and 180 days to complete the purchase after selling your property. These are strict calendar-day deadlines per IRS instructions.
Do California rules change my exchange?
- California generally conforms but requires state reporting and may track deferred California-source gain, especially if you buy out of state per FTB.
What is a qualified intermediary and why do I need one?
- A QI holds funds and documents the exchange so you do not receive the cash, which preserves deferral per IRS guidance. Compare fees and safeguards across providers industry overview.
Can I buy a DST or fractional interest as my replacement?
What happens if I get cash back at closing?
- Cash or other non-like-kind property received is boot and can be taxable to that extent per IRS rules.
Are there special rules for related-party exchanges?
- Yes. Section 1031(f) has added restrictions. Generally you and the related party must hold the properties for two years, subject to narrow exceptions see statute.
What local closing costs should I budget for?
- Plan for escrow/title fees and documentary transfer tax. LA County generally charges $0.55 per $500 of consideration, and some cities add their own tax. Include potential California withholding if there is boot or a failed exchange County tax info and FTB Form 593.
