1031 Exchange

Many owners who sell to us are doing a 1031. Here's how it works.

When an owner sells us an apartment building, the sale is often the first leg of a 1031 exchange. Long-term LA owners rarely sell just to cash out and pay the tax, unless they have a step up basis. They sell to trade up, to get out of management, or to get out of rent control, and they defer the gain while doing it.

So this page covers exactly that: how to sell your building to The Beverly Group and roll the proceeds into a 1031 exchange. The tax treatment is your CPA's work. What we solve is the thing that breaks more exchanges than anything else, which is the closing date.

Most exchanges that fail don't fail at the end. They fail in the first three weeks, because the seller didn't know when their building would actually close and couldn't shop for a replacement with any confidence. A direct sale to us fixes the date. Everything else in your exchange gets easier from there.

The two dates that govern the whole thing

Section 1031 gives you two windows. Both start the day your relinquished property (the downleg, the building you're selling us) records.

• 45 days to identify. You have until midnight on day 45 to identify replacement property in writing to your qualified intermediary. Three properties, or any number so long as their combined value stays under 200% of what you sold.
• 180 days to close. You have until day 180, or your tax return due date including extensions, whichever comes first. Sell in October without extending and your 180 days can be shorter than 180 days.

Neither window is extendable. Not for a slow lender, not for a seller who changes terms, not for the holidays. The IRS extends these dates only in federally declared disaster areas, and weekends count against you. A 45-day window that ends on a Sunday ends on that Sunday.

Every day you spend not knowing your closing date is a day you can't plan.

Why a public listing is often the part that breaks

A conventional listing is built to discover a price. That's what it's good at, and if price discovery is the thing you need most, list the building. But discovery takes time, and it hands you a closing date only at the very end, if things go well.

The sequence runs like this. Two to four weeks to prepare the offering. One to six months on market. Then offers, a counter, a selected buyer, and a forty-five to sixty day escrow, assuming the first buyer performs. Call it three to five months, and often more, and you don't have a reliable closing date until you're eight or ten weeks in.

For a straight sale, fine. For an exchange, it means you're looking at replacement property without knowing when your money arrives. Or you're sitting out of the market waiting, then trying to find an upleg in forty-five days during whatever the market happens to be doing that month.

The worse version is the retrade. Your buyer finishes inspections at day thirty of a sixty-day escrow and comes back asking for a credit. Now you're choosing between a lower price and starting over, with an identification window you've already half spent.

When you sell to us, none of that machinery exists. No marketing period, no lender, no appraisal contingency, and the closing date is a number you pick before you sign. That is why so many of the owners who call us are exchangers.

What Measure ULA does to the arithmetic

If the building is inside the City of Los Angeles, Measure ULA applies to the transfer. It's charged on the gross sale price, not your gain, and the exchange does not defer it. It's a closing cost, and it comes off the top before anything rolls into your upleg.

The rates are 4% on transfers at or above the first threshold and 5.5% at or above the second. Both thresholds adjust annually, so confirm the current figures with your escrow officer before you model anything. The base amounts were $5 million and $10 million when the measure took effect and go up each year, so it's worth checking what the amount is today.

Why it matters here: look at what a six million dollar building inside the city gives up at close.

Measure ULA at 4%	$240,000
County and city documentary transfer tax	about $34,000
Commission at 5%	$300,000
Off the top, before escrow and title	$574,000

Nine and a half percent of gross, and roughly $574,000 less rolling into the replacement property. The transfer tax is fixed by ordinance and you can't negotiate it. The commission is the one line you can actually do something about, and in a ULA market that's a bigger lever than it was in 2021. A direct sale has no listing commission in it, which is real money carried forward into your exchange.

None of this is tax advice. Run every number past your CPA and your exchange counsel before you commit to anything.

Rent-controlled buildings as downlegs

An RSO building on an exchange clock is the specific case where things can often go wrong, so it's worth being blunt about why.

A rent-stabilized building in Los Angeles generally trades on the income it actually produces. In-place rents on a building held for a long time are frequently well below market, sometimes by half or more, and the spread can't be closed on any schedule you control. A buyer paying on pro forma needs a lender to agree, and the appraisal comes back on actuals. That gap surfaces around day thirty of escrow, which on an exchange is day ninety of your one-eighty.

Then there's everything a buyer discovers late. Open LAHD or LADBS matters. A soft-story retrofit that hasn't been completed. Tenancies with a history. A buyer who underwrote none of that will ask for a credit or leave, and either answer costs you the exchange.

We underwrite on in-place rents from the first conversation. Not as a negotiating position, but because it's the only number that survives due diligence. On your schedule, a number that survives is worth more than a number that impresses.

Selling to us inside an exchange: how it runs

• A written offer within one business day. Send the address, the rent roll, and last year's operating expenses. You'll have terms in writing the next business day, and you can take those terms to your broker or attorney for a second opinion before you do anything.
• You set the closing date. We buy with our own capital, so we can close in two weeks or hold for six months until your replacement property is lined up. Both are normal for us. Many exchangers pick a date that gives them a running start on the upleg.
• Your escrow, your title, your qualified intermediary. We don't require our own. The QI for your 1031 has to be in place before the sale closes, so bring them in early.
• No financing contingency, no appraisal contingency. There's no lender who can decide in week six that the deal has changed. Your identification clock starts on a date that holds.
• As-is condition. Deferred maintenance and open violations get priced into the offer at the start rather than reopened at day thirty.
• Running a reverse exchange, where the replacement is parked before the sale closes? We have done those too, just tell us at the outset. Those have their own structure and the accommodation titleholder needs to be set up in advance.

Where to start

If you're within a few months of a sale, the useful first step is finding out what a direct sale actually nets into your exchange. That gives you a real number and it takes one phone call and about ten minutes.

Questions we get from exchangers

Can you close fast enough for a 45-day identification?

The identification deadline is about your replacement property, not about us. What we control is the sale of the building you're relinquishing, and once terms are agreed we can be in position to close in as little as two weeks. Most sellers don't want that. Most want a defined date they can plan the upleg around, and that's exactly what a direct sale gives you.

Can you wait if my replacement property is delayed?

Yes. We hold the date you set. If your upleg slips and you need another three or four weeks, we've dealt with that before.

Do you work with my qualified intermediary?

Yes, whichever one you use. We don't have a preferred QI. Your exchange documents need to be in place before the sale closes, so bring your QI in as soon as you have terms.

What happens if I can't find replacement property in time?

That's between you and your CPA, and the outcome is that the transaction becomes taxable rather than deferred. It's worth deciding before you sell how you'd feel about that outcome, because a failed exchange on a building you didn't really want to sell can be the worst version of this.

Does Measure ULA apply to my building?

It applies to transfers of real property within the City of Los Angeles above the thresholds. County areas and other cities, including Beverly Hills, Culver City and Santa Monica, have their own transfer taxes on different terms. Santa Monica has its own measure with its own rates. Your escrow officer can confirm exactly what applies to your parcel.

Can I do this if my building is in probate or held in a trust?

Usually, though the exchange has to be taken by the same taxpayer that held the property, which is where trust and estate situations get technical. We've closed both. Your estate counsel should be in the conversation from the beginning.

The Beverly Group is a principal buyer, not a tax advisor, an attorney or a qualified intermediary. Nothing on this page is tax or legal advice, and the rules described here are summarized rather than stated in full. Talk to your own CPA and counsel before you sell.