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Yes, and Here’s How It Works;

For many real estate investors in Los Angeles and Sherman Oaks, the idea of moving from residential income property into commercial retail property raises an important question. Can you legally complete a 1031 Exchange by selling an apartment building and purchasing a strip mall The answer is yes. The longer explanation shows why this strategy has become increasingly popular for investors seeking stronger cash flow, diversified tenant mixes, and long term appreciation in high demand Southern California markets.

A 1031 Exchange allows investors to defer capital gains taxes by selling one investment property and reinvesting the proceeds into another like kind property. Contrary to what many assume, like kind does not mean the properties must be similar types. You are not limited to exchanging apartments for more apartments or retail centers for more retail centers. Under IRS rules, nearly all real property held for investment or business purposes qualifies as like kind to other real property held for investment. This means an apartment building, duplex, or multifamily asset can be exchanged into a strip mall, a neighborhood retail center, or other commercial investment as long as both properties are held for investment rather than personal use.

This rule creates opportunities for a wide range of strategic portfolio moves in markets like Sherman Oaks where multifamily values have increased sharply over the past decade. Many owners have experienced significant equity growth but feel constrained by rent control, rising operating expenses, or by the daily management challenges that come with residential property. A strip mall offers a very different ownership experience. Owners often deal with fewer tenants, longer lease terms, commercial leases that shift many costs to the tenant, and in many cases more predictable income. For owners looking to move away from hands on residential management, a 1031 Exchange into retail is one of the most effective ways to reposition a portfolio without triggering large tax obligations.

However, completing a 1031 Exchange requires strict compliance with IRS timelines. Once the sale of your apartment building closes, you have 45 days to identify potential replacement properties. This is a hard deadline with no extensions. Because the Los Angeles market is competitive, many investors begin searching for strip malls or other retail opportunities before listing their current building for sale.

The exchange must be completed within 180 days from the sale of the original property. This means the strip mall purchase must close during that period. Commercial properties sometimes involve more detailed due diligence such as environmental reports, lease audits, and tenant estoppel certificates, so early preparation is essential. Staying organized is the key to meeting the required timeline.

Another important rule involves the use of a Qualified Intermediary. You cannot touch or hold the sale proceeds at any stage. The funds must be held and transferred by the intermediary from the sale of the relinquished property into the purchase of the replacement property. Most Los Angeles and Sherman Oaks investors work with established 1031 facilitators who specialize in secure and compliant transfers.

Financing also plays a major role. Lenders evaluate strip malls differently than apartments. Multifamily lending is heavily influenced by occupancy levels and rental history. Commercial lending focuses strongly on tenant credit, lease length, rental increases, and the net operating income of the property. A strip mall with national tenants and long term triple net leases typically attracts more favorable loan terms. A center with mom and pop tenants or vacancies may require stronger borrower qualifications or larger down payments. Planning financing early ensures the exchange stays on schedule.

The strategic advantages of moving from apartments into retail can be significant. Multifamily values in Los Angeles are often high relative to the income they produce which leads to lower cap rates. In contrast, well located strip malls can offer stronger returns, more stable tenants, and leases that reduce the owner’s responsibilities. For investors looking to diversify risk, increase income stability, or simplify management, exchanging into a strip mall can be a powerful step forward.

In summary, yes. In Los Angeles, Sherman Oaks, and throughout California, you can complete a 1031 Exchange from an apartment building into a strip mall. As long as you follow IRS timelines, work with a qualified intermediary, plan financing early, and begin identifying replacement properties ahead of time, the exchange can be both smooth and highly beneficial. For many investors, this move represents a strategic way to grow long term wealth while shifting into a property type that better aligns with their financial and lifestyle goals.

If you need help with 1031 exchange questions, call Simon at (818)761-4252