A recently completed 1031 exchange allowed an investor to defer capital gains taxes by swapping Property A, a $2,500,000 single-family home investment property in San Francisco, for Property B, a $2,500,000 Chase bank building in Reno, Nevada. Both properties had identical purchase prices and equity of $2,500,000, ensuring a seamless exchange.
Property A (Relinquished Property):
- Type: Single-family home investment property in San Francisco
- Value: $2,500,000
- Equity: $2,500,000
- Monthly Income: $8,500
- Vacancy Rate: 5% (95% occupancy, ~28.5 days/month)
- Monthly Expenses: $3,250
- Net Operating Income (NOI): $8,500 × 0.95 - $3,250 = $4,825/month or $57,900/year
- Cap Rate: ($57,900 ÷ $2,500,000) × 100 ≈ 2.32%
Property B (Replacement Property):
- Type: Chase bank building in Reno, Nevada
- Value: $2,500,000
- Equity: $2,500,000
- Monthly Income: $19,500
- Vacancy Rate: 0% (100% occupancy)
- Monthly Expenses: $3,400
- Net Operating Income (NOI): $19,500 × 1.0 - $3,400 = $16,100/month or $193,200/year
- Cap Rate: ($193,200 ÷ $2,500,000) × 100 ≈ 7.73%
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 ($2,500,000) and equity ($2,500,000), the exchange avoided boot. Property B generates significantly higher cash flow ($16,100 vs. $4,825 monthly NOI) and has a 0% vacancy rate compared to Property A’s 5%, offering superior income stability. Its cap rate (7.73%) far exceeds Property A’s (2.32%), indicating a stronger return. The exchange shifted the investor’s portfolio toward higher cash flow and zero vacancy risk, though San Francisco’s potential for long-term appreciation contrasts with Reno’s stable but likely lower-growth commercial 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 enhanced cash flow and stability with a reliable tenant like Chase.
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