At Vantage Wealth, we see wealth as more than numbers on a balance sheet. It’s about creating peace of mind and building abundance that lasts generations. Sometimes that means repositioning an asset that no longer serves you as well as it once did. Real estate has long been a cornerstone of our client’s financial success, but today’s soaring property prices, shrinking yields, and shifting family priorities can make it advantageous to explore alternative paths.
One powerful option for highly appreciated real estate is the IRS Section 1031 exchange. The provision allows investors to defer capital gains taxes by selling one investment property and investing the proceeds into another “like-kind” property. In doing so, money stays invested, helping realign portfolios for higher income, reduced management responsibilities, potentially greater appreciation potential, or even legacy and estate planning goals.
Why Look at 1031 Exchange?
- Lock in appreciation – capture gains without triggering immediate taxes
- Boost income – trade out of a property with low yield into one producing stronger cash flow
- Increase appreciation potential – move into assets that better match long-term goals
- Secure a new home – convert an investment property into a personal residence at today’s values
- Support family – use a 1031 exchange to help children or heirs while managing estate considerations
Case Study 1: From Apartments to Predictable Income
Susan, a longtime client, owned a 12-unit building in Los Feliz. The property’s value had climbed dramatically, but rental income hadn’t kept up, leaving her with a low yield relative to current price. In addition, Susan managed the building herself and was constantly required to make repairs and handle tenant complaints.
Through a 1031 exchange, she sold the apartments and bought a triple-net (NNN) commercial property leased to a national retailer. The transaction resulted in stronger and steadier income, minimal management headaches, and room for future growth.
Case Study 2: Turning an Investment into a Dream Home
The Martins rented out a duplex for nearly 20 years. The value had appreciated significantly, but their lifelong dream was to own a second home in a coastal town. Selling outright meant a big tax hit that would have shrunk their options.
Instead, they used a 1031 exchange to buy the perfect Mendocino home. Meeting IRS rules, they rented it out for two years, then moved in themselves with the intention of owning the home for the long-term. Today, the property serves as their perfect getaway retreat, often filled with family and friends. The Martins not only secured their dream home at today’s prices, but also without having to pay capital gains taxes that would have otherwise prevented them from buying it.
Case Study 3: Helping the Next Generation
David and Jane owned a rental property that had gained significant value, but what they cared about most was helping their son afford a home in an elevated market.
Through a 1031 exchange, they swapped the rental property for another home that their son could live in. For two years, their son rented the home at fair market value. After the required two-year period, David and Jane gifted the home to him. The 1031 transaction allowed them to defer taxes, provide stability for their son, and transfer wealth seamlessly.
Key Provisions to Keep in Mind
- Like-kind property: both properties must be for investment or business use
- Timeline: identify the replacement within 45 days, close within 180 days
- Qualified intermediary: funds must pass through a neutral third party
- Holding period: typically two years of rental or investment use before conversion to personal use
- Deferral vs. elimination: taxes are deferred, not erased, unless the property receives a step-up in basis at death
The Vantage Wealth Perspective
Our role is to help clients align investments with what abundance means to them – financial freedom, more time for leisure or travel, or leaving a legacy. A 1031 exchange is just one of many strategies to reduce taxes, preserve wealth, and create new opportunities for abundance.
As Susan, the Martins, and David and Jane’s stories show, the right move can reshape both financial and life priorities. With thoughtful planning, a 1031 exchange can serve as a bridge to your next chapter in life while meeting your financial goals.
Sources: IRS, First American Exchange Company, American Bar Association, various other sites