1031 Exchange Case Study:

Trading Up from Medford to Somerville

A few months ago, I helped a long-time client execute a successful 1031 exchange. I thought I would share his experience with you so you can better understand the value of a 1031 exchange and how it may apply for your unique situation.

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​What is a 1031 exchange? A 1031 exchange allows a property owner in the U.S. to sell their investment property and put the equity + any gains into one or multiple new investment properties without paying any capital gains or depreciation recapture taxes - which often results in 25% - 35%+ in taxes. There are a number of rules you must follow in order to comply - email Sage@CambridgeSage.com with "1031" if you’d like my FREE guide to learn more about the 1031 exchange process.

Background

This client owned a 2-family in South Medford for the past 5 years. He purchased the property for $680,000. The first floor had a 2 bed / 1 bath unit and the second floor had a 2 bed / 1 bath unit with an office. Both units had living and dining rooms plus a shared tandem driveway.

This part of South Medford generally does not attract a large pool of tenants. The DOM (days on market) tends to be high. So it can take a long time to get units rented, and even then the property management time commitment can be intensive in this part of South Medford.

Even still, this owner owned the property for 4ish years without too many issues.

The Challenge

However, that all changed when the owner took on a new tenant. Not too long after this new tenant moved in, she sadly passed away. And then her son and many friends (who were not on the lease) took over the upstairs unit without any communication to the owner.

These tenants didn’t pay rent and completely destroyed the apartment. They also brought in a very aggressive dog and didn’t take care of the dog (i.e. there was dog poop everywhere - in the basement, in the yard, and in most common areas).

The owner was forced to pay expensive attorney fees, while he wasn’t getting rent. This process went on for many, many months.

Eventually, after a lot of back and forth, the tenants agreed to vacate the unit. However, the unit was completely destroyed.

Now the owner was stuck in a tough place. He had just lost a significant amount of money, in the multiple 5 figures range. He also lost many weeks of time working through this challenge and this entire process was extremely stressful. What should be done?

The Solution

I looked at the condition of the upstairs unit and realized it was worth making a significant update to the unit and then selling the entire multi-family property.

My feeling was this owner could realize excellent gains in a relatively short period of time (5 years) and take those gains into a different local market with a significantly different tenant pool and better rental rates.

So with my recommendations, we worked closely with a general contractor to completely remodel the upstairs unit. In total, the upstairs unit renovation work cost approximately $100k, bringing their total investment into the property to $780k, not including missed rent from the upstairs tenant or attorney fees.

I worked to stage and photograph the unit and was able to leverage many offers against each other to drive up the price with the cleanest terms possible.

Ultimately, we were able to sell the property for $1,095,000. That’s a $315,000 gain in just 5 years of owning the property.

The 1031 Exchange

Once the property went under agreement, we began to aggressively look for better investment opportunities that would decrease his stress but provide him with excellent returns.

Eventually we came across a property at 220 Summer St in Somerville. This was a 3-family home about ½ mile to Porter Square. This was also a much larger property with 8 beds, 4 full bathrooms and 3,376 sq ft of living area. It brought in $9,800/month in rents - which was much higher than his previous Medford property, which only had 2,112 sq ft of living area and drew in roughly $5,000/month in rents.

I worked closely with my client and the 1031 exchange team to ensure a smooth transaction. Within 2 months, he successfully sold his 2-family in Medford and replaced it with the 3-family in Somerville, all while deferring that large capital gain and depreciation recapture tax (easily $100k+ in taxes if a 1031 did not take place).

Why was it worth it?

There were a number of reasons why this 1031 exchange was a no-brainer and MAJOR win for my client:

  1. He leveraged only his original funds (i.e. his original downpayment on his old property and the property’s gains) in order to obtain a new, much more valuable property.

  2. He traded a stressful, time consuming property in a so-so area for a property in a great area with significantly less time commitment and much less stress.

  3. He doubled his monthly rental revenue.

  4. The new property’s units were already rented through end of August 2025, so no leasing or updates were required. He immediately realized additional rental income.

  5. The new property’s units are all in excellent condition, with updated kitchens/bathrooms and laundry in-unit, meaning there will be very minimal work required in the future.

  6. All 3 units have room for rental growth now and in the future and the same can be said about property value.

I still remember when I first found out that there were squatters living in my client’s Medford property. I really felt for him. It was an extremely stressful situation and at the time there was a feeling that the stress would never end.

It’s amazing how in just a few months, one transaction can completely change your financial, personal and emotional life.

And I believe this is why 1031 exchanges can be so powerful.

1031 exchanges give you, the property owner, the power to rebalance your assets in a way that makes sense for you given your unique life circumstances at this precise moment in time.

If you have questions about this case study or 1031 exchanges in general, give me a call at 617-833-7457 or email me at Sage@CambridgeSage.com.