Monetize California Equity Without Taxes

Conatus Real Estate had the opportunity to present a deal profile on how to “Monetize California Equity Without Taxes” at the Orange County Real Estate Investors Association (OCREIA) meeting. We received positive feedback on the content so we wanted to share with our network.

Key Takeaways

• Many people that own California investment real estate have a lot of equity, but low cash flow — and could trigger significant tax bills upon sale
• A 1031 Exchange can help to achieve a multiple on current income and defer all capital gains taxes
• Over 370,000 properties in Los Angeles and Orange Counties alone could benefit from a 1031

Case Study

Our customer came to us in the spring of 2018 with a property in Manhattan Beach that they had purchased for $17,000 in the 1950s. They lived in the house until about 2016, at which time they decided to rent it out for $2,500 per month.

The problem: this was a teardown worth $3.4 million, but nearly all of it was gain. The property generated $30,000 annually in rent but carried $25,000 in annual expenses. A sale could trigger over $1 million in taxes.

How 1031 Exchanges Work

1031 exchanges work through a Qualified Intermediary holding proceeds from property sales. Sellers identify replacement properties within 45 days and complete purchases within 180 days. Critical timing: engage intermediaries before closing the relinquished property sale.

The Solution

The solution involved purchasing twelve homes across San Antonio, Kansas City, and Memphis, generating underwritten annual income of $130,000 compared to the original $23,000. Additionally, Section 121 exclusion benefits allowed the owner to retain $250,000 cash while deferring all taxes.

The Opportunity

Market analysis reveals over 370,000 candidate properties in Los Angeles and Orange Counties alone with substantial gains and insufficient cash flow, representing over $2 billion in potential tax-deferred exchanges. Do you own one of them?