1031 Exchanges in California: Rules, Deadlines and State Tax

By Matthew Martinez, Founder, CEO & Managing Broker, Diamond Real Estate Group. California DRE #01869679.

A 1031 exchange lets the owner of real property held for investment or business use defer tax on the gain by trading it for other like-kind real property instead of taking the cash. In a typical deferred exchange, a qualified intermediary holds the sale proceeds, you identify replacement property in writing within 45 days of the sale, and you must receive it within 180 days or by your tax return’s due date, including extensions, whichever comes first. California follows the federal rules for state income tax, with its own withholding and reporting requirements.

This page is the starting point for our 1031 guides. It explains what qualifies, how the deadlines run, where boot and debt create tax, the California-specific rules (Form 593 withholding and the FTB 3840 filing for out-of-state replacement property), and how the property tax on the new property is set. We are brokers, not tax advisers: we run the real estate side of the exchange and work alongside your intermediary and CPA.

What qualifies for a 1031 exchange

Section 1031 of the Internal Revenue Code applies to real property held for productive use in a trade or business or for investment, exchanged for real property of a like kind that will also be held that way. Since 2018, only real property qualifies; the Form 8824 instructions say that “for 2018 and later years, section 1031 like-kind exchange treatment applies only to exchanges of real property.” The instructions define real property as land and improvements to land, with some intangibles and certain fixtures included.

Usually qualifies: rental houses and apartment buildings, commercial buildings, land held for investment, and agricultural land such as vineyards, when held for business or investment.
Does not qualify: real property held primarily for sale, such as homes built or flipped for resale, and a home you live in as your residence.
Not like-kind to each other: real property in the United States and real property outside the United States.

Vineyard and ranch owners have extra questions about which parts of an operation are real property; see our guide to 1031 exchanges for vineyards and ranch land. Owners who have lived in a property or used it as a second home should read our guide to vacation homes and former residences in a 1031.

The 45-day and 180-day deadlines

Both clocks start on the day you transfer the property you are selling, and they run at the same time, not one after the other.

Deadline	What must happen	Rule
Day 45	Replacement property identified in a written document you sign, delivered to the seller of the replacement property or another party to the exchange, such as your intermediary	26 U.S.C. 1031(a)(3); Treas. Reg. 1.1031(k)-1(c)
Day 180, or the due date of your return including extensions, if earlier	Replacement property received	26 U.S.C. 1031(a)(3); Treas. Reg. 1.1031(k)-1(b)(2)

The second deadline catches sellers who close late in the year. A relinquished property that closes on November 1, 2026 has a 180th day of April 30, 2027, so if your return for 2026 is due before then, you need to file an extension to keep the full period. Use our 1031 deadline calculator to count the days from your own closing date, and confirm the dates with your intermediary.

How many properties you can identify

The regulations give three ways to identify:

Three-property rule: up to three properties of any value.
200% rule: any number of properties, if their total fair market value does not exceed 200% of the value of the property you sold.
95% rule: if you identify more than either limit allows, the identification still works only if you acquire at least 95% of the total value of everything you identified.

Our guide to 1031 identification rules goes into each test in more detail.

The qualified intermediary and the sale proceeds

If you receive the sale money, or can borrow against it, pledge it or otherwise get its benefit, the exchange fails. That is why most deferred exchanges use a qualified intermediary. The regulations treat a properly set up intermediary as not your agent, provided there is a written exchange agreement, the intermediary acquires and transfers the properties as the agreement requires, and the agreement limits your rights to the money until the exchange period ends or until specific events, such as receiving all of your replacement property.

The intermediary cannot be you or a “disqualified person” as the regulations define that term, so choose one before your sale closes and before any money moves. Our qualified intermediary guide goes further. Diamond may refer you to partners we work with; you’re free to choose any provider.

Boot, debt and “equal or greater”

An exchange can be partly taxable. Gain is recognized up to the amount of cash and other non-like-kind property you receive, called boot, and Form 8824 counts net liabilities taken over by the other side as boot too. Losses are not recognized.

In practice, to defer all of the gain you buy replacement property of equal or greater value, reinvest all of the net proceeds and replace the debt you paid off, either with new debt or with added cash. Your basis in the new property generally carries over from the old one, which is how the gain stays deferred rather than forgiven. More in our guide to boot and partial exchanges.

California rules: conformity, withholding and the clawback

State income tax

California generally follows the federal rules on gain and loss from dispositions of property, including Section 1031, through Revenue and Taxation Code 18031. Under section 18031.5, California adopted the federal real-property-only limit for exchanges completed after January 10, 2019, at first only for higher-income taxpayers; that income threshold does not apply to tax years beginning on or after January 1, 2025. The FTB’s 2025 Form 3840 instructions state that California like-kind exchanges are limited to real property.

Form 593 withholding at closing

California normally requires withholding on real estate sales of 3 1/3% of the sales price, or an elected rate on the estimated gain. In a deferred exchange, the sale is exempt from withholding at the initial transfer. If you receive more than $1,500 in cash or other boot, the intermediary withholds on it, and if the exchange fails, the intermediary must withhold 3 1/3% of the sales price.

Under Revenue and Taxation Code 18662, an intermediary in a failed exchange must notify the FTB within 10 days after the deadline passes. See our Form 593 guide.

Buying out of state: the FTB 3840 filing

If you exchange California real property for property in another state, you must file Form FTB 3840 for the year of the exchange and every year after until the deferred gain is recognized, even if you have no other California filing requirement. California keeps its claim on the California-source gain, which it taxes when you later sell the replacement property in a taxable sale; this is often called the California clawback. More in our guide to the California clawback and FTB 3840.

Property tax on the replacement property

A 1031 exchange defers income tax. It does not carry your Proposition 13 assessed value to the new property.

Buying the replacement property is a change in ownership, so the county assessor reassesses it to current market value as of the date of the purchase. A Preliminary Change of Ownership Report is typically filed when the deed records.

Proposition 19’s base year value transfer is for principal residences of qualifying homeowners, not for rental or investment property, so it does not help here. Budget the property tax at the new purchase price when you run the numbers on a replacement property. See our guide to California property tax for investors.

Reverse, improvement and other structures

Not every exchange is a simple sale followed by a purchase. Each of these has its own rules and its own guide:

Reverse exchange: you buy the replacement property before selling the old one, with an accommodator holding title in the meantime. See reverse 1031 exchanges.
Improvement exchange: exchange funds pay for construction on the replacement property before you take title. See improvement (build-to-suit) exchanges.
Delaware statutory trusts: a fractional interest in a professionally managed property used as replacement property. See Delaware statutory trusts in a 1031.
Related-party exchanges: if you exchange with a relative or a related entity and either of you disposes of the property within two years, the deferral is generally lost, with exceptions for a death, an involuntary conversion or a showing that tax avoidance was not a principal purpose. You file Form 8824 for the two years after the exchange year.

How an exchange runs alongside a North Bay sale

Most of the risk in a 1031 exchange is timing, and most of the timing is set by the real estate contracts. A typical sequence:

Plan before you list. Talk to your CPA about the gain, debt and whether a full or partial exchange makes sense, and line up an intermediary.
Put the exchange in the sale contract. Include language that the buyer will cooperate with your exchange at no cost or liability to them.
Sign the exchange agreement before closing. The intermediary’s documents go into escrow, and the proceeds go to the intermediary, not to you.
Start looking early. Tour replacement properties during the sale escrow, since 45 days passes quickly in a market with limited inventory.
Identify in writing by day 45. Sign and deliver the identification within the three-property or 200% limits.
Close the replacement by day 180. Build loan approval, inspections and any lease review into a contract that closes with room to spare.
Report it. File Form 8824 with your federal return and, for out-of-state replacement property, Form FTB 3840 with California.

For the sale side, see our guides to selling a rental property in California and commercial property sales and leasing.

Questions people ask

What are the 1031 exchange rules in California?

The federal rules: real property held for business or investment, exchanged for like-kind real property, with replacement property identified within 45 days and received within 180 days or by the return due date, if earlier. California follows them for state tax and adds Form 593 withholding rules and the FTB 3840 filing for out-of-state replacement property.

Does California tax a 1031 exchange?

Not at the time of a fully deferred exchange. California defers the gain along with the IRS. Tax is due on any boot you receive and on the deferred gain when you later sell the replacement property in a taxable sale.

What is the California clawback?

When you exchange California property for property in another state, California keeps the right to tax the California-source gain when the replacement property is later sold. You must file Form FTB 3840 every year until that gain is recognized.

Can I do a 1031 exchange on my primary residence?

Not on the home while you use it as your residence; Section 1031 covers property held for business or investment. Former residences and mixed-use properties raise separate questions covered in our vacation home and residence guide.

Do I have to buy a more expensive property?

To defer all of the gain, you generally buy property of equal or greater value, reinvest all the net proceeds and replace any debt paid off. You can buy for less, but the difference is boot and is taxable up to your gain.

Is California withholding taken out at closing in a 1031 exchange?

Not on a deferred exchange at the initial sale. The intermediary withholds if you receive more than $1,500 in boot, and withholds 3 1/3% of the sales price if the exchange fails.

Can I exchange property with a family member?

Yes, but if either of you disposes of the exchanged property within two years, the deferral is generally lost, with limited exceptions. Related-party exchanges also require filing Form 8824 for the two years after the exchange.

Did the 1031 rules change for 2026?

The 2025 Form 8824 instructions still limit exchanges to real property, as they have since 2018, and keep the 45-day and 180-day deadlines. Check the current year’s IRS instructions with your CPA before you rely on any rule.

This is general information, not legal or tax advice; talk to a CPA, a California tax attorney or your qualified intermediary about your situation.

If you own investment property in the North Bay and are weighing a sale and exchange, talk to us through our investment property services about timing, replacement options and the numbers before you list.

Sources & notes

Last reviewed October 2026 by Matthew Martinez.