How does a 1031 exchange work when you sell Highland Park income property?

Sidney Manzo is a Highland Park real estate agent who handles income-property sales and helps owners time a sale with their exchange, in real estate since 1990.

The IRS guidance on like-kind exchanges sets the basic tests:

• Use: both properties must be held for business or investment use. A primary residence, second home or vacation home doesn't qualify.
• Like-kind: most real estate is like-kind to other real estate. A rental house is like-kind to vacant land, for example. Property in the United States is not like-kind to property outside it.
• Who can exchange: individuals, corporations, partnerships, LLCs, trusts and other taxpayers.

Quick screen

• ☐ Is it rented, or held for investment, rather than lived in?
• ☐ Will the replacement also be investment or business real estate in the U.S.?
• ☐ Can you keep your hands off the sale proceeds? The IRS points to a qualified intermediary for this.
• ☐ Do you have a CPA or tax attorney on the exchange now, before you list?

Both clocks start the day the Highland Park property sells.

The IRS also warns about two things. Choose your intermediary carefully, because some have gone bankrupt or failed to meet their obligations. And be wary of promoters who call exchanges "tax-free"; the IRS describes them as tax-deferred.

Decision point: if you can't shortlist replacements before you go into escrow, negotiate a longer close on the Highland Park sale. Don't count on finding them in 45 days.

The Franchise Tax Board's FTB 3840 instructions say that if you exchange California real property for like-kind property outside California, you must file form FTB 3840. You file it for the year of the exchange and each later year, generally until the California-sourced deferred gain or loss is recognized. Tell your CPA early if you're buying out of state.

Tenants and the RSO. LAHD states that the City's Rent Stabilization Ordinance generally applies to rental properties first built on or before October 1, 1978. Covered rental units must be registered, and an RSO notification must be posted. Much of Highland Park's older housing stock predates 1978 (the HPOZ's period of significance runs from 1886 to 1961, per the Preservation Plan). Gather registrations, leases and rent histories before you list. Buyers will price tenancy into the offer, and tenant questions go to an attorney.

HPOZ and a buyer's plans. City Planning describes Highland Park–Garvanza as the largest HPOZ in the city and the first to include commercial buildings, which matters for mixed-use property along Figueroa and York. The 2010 Preservation Plan sets the review tiers. Exempt and staff-level work is limited to items such as in-kind repairs. Larger exterior changes go to the HPOZ Board, and new construction is reviewed for a Certificate of Appropriateness. Buyers who plan to add units or change facades should confirm the path with City Planning before removing contingencies. A clear record of past approvals helps.

City transfer tax and Measure ULA. The Office of Finance chart shows an applicable City rate of 0.45% for conveyances up to $5,400,000, 4.45% for those over $5,400,000 and under $10,900,000, and 5.95% at $10,900,000 or more. The Office of Finance states: "Effective for transactions closing after June 30, 2026, the new ULA thresholds will be $5,400,000 and $10,900,000." Hypothetical arithmetic only: a $6,000,000 City sale would pay about $267,000 in City tax at 4.45%, plus County tax of $1.10 per $1,000 ($6,600). Model this before pricing near a threshold, and ask a CPA how transfer taxes affect your exchange.

Seller's file

• ☐ Rent roll, leases, deposits, and RSO registration if covered
• ☐ Operating expenses for the past 24 months
• ☐ Permit history (LADBS) and the City's Residential Property Report (LAMC 96.300), required for residential property
• ☐ Any HPOZ approvals or Certificates of Appropriateness on file
• ☐ Qualified intermediary agreement signed before closing
• ☐ Draft replacement shortlist, with backups for the 45-day list

Commission, escrow and title, the transfer taxes above, intermediary fees, and any tenant-related costs your attorney identifies.

The amount or rate of real estate commissions is not fixed by law. They are set by each broker individually and may be negotiable between the seller and broker.

Sidney Manzo, CA DRE #01108914
In real estate since 1990 · RE/MAX Hall of Fame · Member, Pasadena Association of REALTORS® and California Association of REALTORS® (C.A.R.)
Brokerage: RE/MAX Dream Properties (ASLG Inc), CA DRE #02142193