1031 Exchange in San Diego: How to Defer Capital Gains and Scale Your Portfolio
If you own an investment property in San Diego or anywhere in California, a 1031 exchange can be one of the most powerful tools available to grow your real estate portfolio.
A properly structured 1031 exchange allows you to sell an investment property and defer capital gains taxes by reinvesting the proceeds into another qualifying property. Instead of writing a six-figure check to the IRS and California Franchise Tax Board, you keep that capital working for you.
For San Diego investors sitting on large appreciation, this strategy can dramatically increase buying power.
What Is a 1031 Exchange?
A 1031 exchange, named after Section 1031 of the Internal Revenue Code, allows investors to defer capital gains taxes when selling an investment or business-use property, as long as they reinvest into a “like-kind” replacement property.
Like-kind does not mean identical.
You can exchange:
A single-family rental in Clairemont for a duplex in North Park
A 2–4 unit property in La Mesa for a larger multifamily in University Heights
Residential investment property for commercial property
San Diego property for out-of-state investment property
As long as both properties are held for investment or business use, they qualify.
Primary residences do not qualify.
Why San Diego Investors Use 1031 Exchanges
San Diego appreciation over the past decade has been significant. Many investors are sitting on substantial unrealized gains.
Without a 1031 exchange, you may owe:
Federal long-term capital gains tax
California state capital gains tax
Depreciation recapture tax
On a $500,000 gain, your total tax liability can easily exceed $100,000 to $150,000 depending on your situation.
A 1031 exchange defers those taxes, allowing you to:
Increase purchasing power
Move from smaller to larger multifamily assets
Trade into higher cash-flowing properties
Reposition from management-heavy properties into newer construction
Consolidate multiple rentals into one larger asset
This is how investors compound wealth over time.
Key 1031 Exchange Rules You Must Follow
1. Use a Qualified Intermediary (QI)
You cannot take possession of the sale proceeds. Funds must be held by a qualified intermediary who facilitates the exchange.
If you touch the money, the exchange is disqualified.
2. Identify Replacement Property Within 45 Days
You have 45 calendar days from the sale closing date to formally identify replacement properties in writing.
No extensions.
3. Close Within 180 Days
You must close on the replacement property within 180 days of selling the original property.
Both deadlines run concurrently.
4. Equal or Greater Value
To fully defer taxes, the replacement property must be equal or greater in value, and you must reinvest all net proceeds and replace the debt.
1031 Exchange Example in San Diego
An investor sells a 2-unit property in San Diego for $1,200,000 with $500,000 in gain.
Without a 1031 exchange:
Federal capital gains tax
Depreciation recapture
California state tax
Total tax could exceed six figures.
With a 1031 exchange:
Entire equity rolls into a larger 4-unit property
Taxes deferred
Rental income increases
Long-term appreciation potential improves
This is how many investors scale from duplexes into 8–20 unit properties over time.
Common 1031 Exchange Mistakes
Missing the 45-day identification deadline
Waiting too long to start searching for replacement property
Failing to line up financing early
Attempting to exchange a primary residence
Not coordinating with a CPA before listing
In San Diego’s competitive market, preparation matters. You should be underwriting replacement options before your property even hits the market.
Can You Do a 1031 Exchange Into a San Diego Multifamily Property?
Yes. In fact, 2-4 unit properties in San Diego are one of the most common 1031 exchange targets.
Many investors exchange out of:
Older underperforming rentals
Properties with deferred maintenance
Low-rent long-term tenants
And trade into:
Value-add multifamily
ADU opportunities
Newer construction 4-unit properties
Coastal short-term rental assets (where permitted)
The key is identifying strong replacement inventory early.
Is a 1031 Exchange Right for You?
A 1031 exchange makes sense if:
Your property has appreciated significantly
You want to defer capital gains taxes
You want to increase cash flow
You are repositioning your portfolio
You are planning long-term wealth building
It may not make sense if:
You need liquidity
You want to exit real estate entirely
You cannot meet reinvestment requirements
Every situation is different. This is where strategy matters.
Final Thoughts: Strategic 1031 Exchange Planning in San Diego
A 1031 exchange is not just a tax strategy. It is a portfolio growth strategy.
Done correctly, it allows you to:
Preserve capital
Increase leverage responsibly
Upgrade asset quality
Compound long-term equity
If you are considering selling an investment property in San Diego and want to evaluate whether a 1031 exchange makes sense, start planning before listing your property.
The timing rules are strict. The strategy should not be.
Twana Rasoul
San Diego Multifamily & Investment Property Specialist
DRE #02026495
619-792-8295
If you are considering a 1031 exchange in San Diego, reach out to discuss your options and replacement strategies before you sell.