A recently completed 1031 exchange allowed an investor to defer capital gains taxes by swapping Property A, a $1,500,000 single-family home investment property in San Francisco, for Property B, a $1,500,000 storage unit in Bakersfield. Both properties had identical purchase prices and equity of $500,000, ensuring a seamless exchange.
Property A (Relinquished Property):
- Type: Single-family home investment property in San Francisco
- Value: $1,500,000
- Equity: $500,000
- Monthly Income: $5,500
- Vacancy Rate: 7% (93% occupancy, ~25.5 days/month)
- Monthly Expenses: $1,500
- Net Operating Income (NOI): $5,500 × 0.93 - $1,500 = $3,615/month or $43,380/year
- Cap Rate: ($43,380 ÷ $1,500,000) × 100 ≈ 2.89%
Property B (Replacement Property):
- Type: Storage unit in Bakersfield
- Value: $1,500,000
- Equity: $500,000
- Monthly Income: $11,500
- Vacancy Rate: 2% (98% occupancy, ~29.4 days/month)
- Monthly Expenses: $1,500
- Net Operating Income (NOI): $11,500 × 0.98 - $1,500 = $9,770/month or $117,240/year
- Cap Rate: ($117,240 ÷ $1,500,000) × 100 ≈ 7.82%
Exchange Summary:The completed 1031 exchange enabled the investor to defer taxes by exchanging Property A for Property B, both qualifying as like-kind investment properties. With equal values ($1,500,000) and equity ($500,000), the exchange avoided boot. Property B generates significantly higher cash flow ($9,770 vs. $3,615 monthly NOI) and has a lower vacancy rate (2% vs. 7%), offering greater income stability. Its cap rate (7.82%) far exceeds Property A’s (2.89%), reflecting a stronger return. The exchange shifted the investor’s portfolio toward higher cash flow and lower vacancy risk, though San Francisco’s potential for appreciation contrasts with Bakersfield’s stable but less growth-driven market. The transaction complied with IRS rules, using a qualified intermediary and meeting timelines (45 days to identify, 180 days to close). The investor now benefits from improved cash flow and operational stability.
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