Looking to 1031 out of the California market

[Jason W.]

Hello BP! I am located in Southern California. In order to take advantage of the current market, I am deciding whether to sell my SFH Southern California property I bought in 2014 and do a 1031. As you know, the California market is saturated and is very difficult to get good positive cash flow. If I do decide to 1031, I would like to look for high growth opportunities (residential or commercial) in other states. I haven't done thorough research yet but a few options that I looked into are: Philly, Memphis, Nashville, or Austin.

Any suggestion is appreciated!

[Dave Foster]

@Alex Uman, thanks for that shout out.  @Jason W., this is. as much a philosophical decision as it is logistical.  There's a bitter sweetness for the CA investor.  the appreciation is awesome.  The cash flow - not so much.  So when the appreciation environment stagnates and the local taxation and political scene becomes un landlord friendly this is what folks have to decide to do - exit CA to find better cash flow and maybe lose out on the next great appreciation run up.

CA also wants to make it just a little more difficult for those monies to leave the state with the "California Clawback" whic requires you to annually report on properties you 1031 out of CA.  It won't affect you in the least (other than the annual filing).  But if you ever later sell that property without a 1031 exchange CA will want you to pay tax to them for the amount of gain while it was in CA.  Not a show stopper by any means.  But something to think about.

As far as where to invest - the 1031 lets you go anywhere.  And it will let you change classes of real estate - moving from SF to MF and residential to commercial are all moves you can consider.

One piece of advice though - try to have enough due diligence done so you can be laser and narrowly focused on your replacement type and location before your old property sells. The folks I see having trouble completing 1031s are generally those trying to cast too broad a net and the decision paralyzes them.