Answer
Aug 14, 2025 - 11:12 AM
Whether you're going to pay higher property tax on your replacement property is a function of where was your property and what is your property tax basis. You are correct. Thanks to Prop 13 in California, if you've owned a property for 20 years, you are likely, for property tax purposes, at an assessed value of debt is significantly lower than what the assessed value is going to be of your replacement property. There are other states that have lower property tax rates than California. Despite Prop 13, last I checked, California is ranked 16th in despite Prop 13 in terms of the actual taxes that people pay, partially because of all the other taxes that local governments pass on top of the ad valorem tax. So whether or not you are going to have a higher property tax bill on a replacement property in 1031 exchange has some variables, including how long did you own your other property, where was it located, and where are you buying your new property. But to your point, you are correct. That is something you have to factor in, when you're doing any kind of real estate analysis on a replacement property in a 1031 exchange is, you know, your revenues and expenses and how is that all going to add up to a new net operating income. I will take the opportunity to tell you, though, that for the vast majority of our clients, we are increasing their income when we do a 1031 exchange simply by virtue of the fact that our clients are selling highly appreciated real estate, in places where the property value over the last 15, 20 years far outpaced the growth in the rental revenue. And when that happens over time, your equity in your property grows faster than your rental income, and your net income as a percentage of your equity that may have started off at 6% or 7% when you bought the property is now down to 2% or 3%, And if you're getting a 2% yield on your equity, and you reinvest in a program in the Southeast paying a 4%, 4% doesn't sound very exciting, but 4% still doubles the income that you're getting on your California metal property. That is what I just described as not exaggerating. This isn't a typical scenario. So, again, when your property appreciates... much faster than your rental income, over time you start to develop what we call debt equity. And debt equity is the killer because now you're not realizing the income that you should be receiving commensurate with the risk and liability and hassle of being a rental property owner.
