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 Starbucks corner retail space in Sacramento. Both properties had identical purchase prices and equity of $750,000, ensuring a seamless exchange.
Property A (Relinquished Property):
- Type: Single-family home investment property in San Francisco
- Value: $1,500,000
- Equity: $750,000
- Monthly Income: $5,500
- Vacancy Rate: 5% (95% occupancy, ~28.5 days/month)
- Monthly Expenses: $1,650
- Net Operating Income (NOI): $5,500 × 0.95 - $1,650 = $3,575/month or $42,900/year
- Cap Rate: ($42,900 ÷ $1,500,000) × 100 ≈ 2.86%
Property B (Replacement Property):
- Type: Starbucks corner retail space in Sacramento
- Value: $1,500,000
- Equity: $750,000
- Monthly Income: $9,000
- Vacancy Rate: 0% (100% occupancy)
- Monthly Expenses: $2,100
- Net Operating Income (NOI): $9,000 × 1.0 - $2,100 = $6,900/month or $82,800/year
- Cap Rate: ($82,800 ÷ $1,500,000) × 100 ≈ 5.52%
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 ($750,000), the exchange avoided boot. Property B generates higher cash flow ($6,900 vs. $3,575 monthly NOI) and has a 0% vacancy rate compared to Property A’s 5%, offering superior income stability. Its cap rate (5.52%) significantly exceeds Property A’s (2.86%), 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 Sacramento’s stable but likely lower-growth retail 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 stability with a reliable tenant like Starbucks.
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