California follows federal 1031 exchange rules with additional state requirements, including state income tax considerations and specific reporting for out-of-state exchanges.
This information is for educational purposes only and is not legal or tax advice. Consult with qualified professionals regarding your specific situation.
Important regulations and tax implications for your exchange
Up to 13.3% (highest in nation)
Yes, with exceptions
County transfer taxes vary
FTB 3840 required for out-of-state exchanges
Follows federal guidelines with state registration
• Federal Form 8824 • California Form FTB 3840 (for out-of-state exchanges) • Complete closing statements for both properties
Yes
Informational step-by-step guide for your 1031 exchange
You must identify potential replacement properties within 45 days of selling your relinquished property. In California, consider property tax reassessment implications and local zoning regulations when identifying properties.
Work with a qualified intermediary to handle the exchange funds and documentation. California has several experienced QIs who specialize in California's unique reporting requirements.
Complete the purchase of your replacement property within 180 days of selling your relinquished property. California closing processes typically take 30-45 days and involve additional documentation.
Report your 1031 exchange on your federal and California tax returns for the year of the exchange. California requires Form FTB 3840 for out-of-state exchanges.
Report your 1031 exchange on your California tax return (Form 540) for the year of the exchange. If exchanging California property for out-of-state property, file Form FTB 3840 annually until the deferred gain is recognized.
Be aware of Proposition 13 implications. California property taxes are based on purchase price plus a maximum 2% annual increase. A 1031 exchange does not reset the property tax base for replacement properties acquired within California.
Review local zoning regulations and development codes, which vary significantly between California municipalities. San Francisco and Los Angeles have particularly restrictive regulations compared to other areas.
Recent changes and upcoming regulations affecting 1031 exchanges
The California Franchise Tax Board increased enforcement of FTB 3840 filing requirements, issuing Notices of Proposed Assessment to adjust income for previously deferred gains plus penalties and interest for non-compliant taxpayers.
The IRS extended 1031 exchange deadlines for businesses and individuals affected by California wildfires, providing relief for the 45-day identification and 180-day completion periods.
While conforming to the federal TCJA limitation of 1031 exchanges to real property, California created an exception allowing personal property exchanges for individuals with adjusted gross income under $250,000 (or $500,000 for joint filers).
Plan and track your critical exchange deadlines
Enter the closing date of your relinquished property to calculate your 1031 exchange deadlines:
Detailed analysis of key real estate markets in your area
Different regions within this state offer unique opportunities and challenges for 1031 exchanges. Here's an overview of key regional markets and their characteristics.
The San Francisco Bay Area remains California's most expensive real estate market, driven by tech industry wealth and severe housing constraints. While prices have moderated from pandemic peaks, strong fundamentals support continued long-term appreciation, particularly in submarkets with good transit access.
The Los Angeles metro offers diverse investment opportunities across its vast geography, with significant submarket variation. Entertainment, media, and technology convergence continues to drive economic growth, while transit expansion is reshaping development patterns.
San Diego offers strong fundamentals driven by life sciences, defense, and tourism, with a desirable climate and limited developable land supporting long-term appreciation. The market has shown resilience through economic cycles due to its diverse employment base.
Sacramento offers the best value proposition among major California markets, with stronger cash flow and continued appreciation potential driven by Bay Area migration and state government stability. The market has transformed from a government town to a diverse economy with growing technology presence.
Investment property insights for California
Multifamily remains the most sought-after property type for 1031 exchanges in California, offering strong appreciation potential despite compressed cap rates in primary markets.
Industrial properties have seen unprecedented demand growth in California due to e-commerce expansion, port activity, and limited developable land.
Retail properties in California show significant variation by submarket and property type, with neighborhood centers outperforming malls and power centers.
Office properties present the most challenging outlook in California, with significant variations by submarket and property class as remote work reshapes demand patterns.
Local tax benefits and programs for property investors
Beyond the tax deferral benefits of a 1031 exchange, this state offers additional tax incentives that can further enhance your investment returns. Review these programs to see if your replacement property might qualify. Please contact a tax professional prior to electing any tax incentive to determine if there are any additional tax concerns or benefits available to you.
California has designated Opportunity Zones that offer federal tax benefits for investments in economically distressed communities. While California does not conform to all federal Opportunity Zone tax benefits, these zones can still provide significant advantages when combined with 1031 exchanges.
Deferral of capital gains taxes until 2026, reduction of taxable gain by up to 10%, and potential elimination of taxes on appreciation if held for 10+ years
Benefits vary based on holding period, with maximum benefits at 10+ years
Invest through a Qualified Opportunity Fund within 180 days of realizing capital gains
The Mills Act provides property tax relief for owners of qualified historic properties who actively participate in the restoration and maintenance of their properties according to historical preservation standards.
Property tax reduction of 40% to 60% on average
10-year contract with automatic yearly extensions
Apply through local government, typically the city or county planning department
EIFDs allow local governments to use tax increment financing to fund infrastructure improvements and economic development in specific districts, potentially increasing property values for investors.
Improved infrastructure and public facilities that can enhance property values
EIFDs can exist for up to 45 years
No direct application for property owners; benefits apply to all properties within the district
Real 1031 exchange examples from California
Current market conditions and future forecasts
Stabilizing prices in core areas with stronger growth in outlying submarkets as remote work enables relocation to more affordable areas.
Moderate growth with significant submarket variation; stronger performance in areas with improving transit infrastructure and entertainment industry presence.
Steady growth driven by life sciences expansion, military presence, and limited developable land.
Above-average growth as Bay Area migration continues and state government provides employment stability.
Long-term appreciation analysis in California
Understanding historical property appreciation patterns can help you identify areas with strong long-term growth potential for your 1031 exchange replacement property.
38.2%
79.5%
187.3%
Continued appreciation expected but at a more moderate pace, with potential volatility tied to tech sector performance
32.6%
72.4%
168.5%
Steady growth projected, particularly in areas with improving transit infrastructure
35.7%
68.9%
152.7%
Strong continued growth expected, particularly in areas with biotech and research presence
42.3%
65.8%
124.6%
Above-average growth projected as Bay Area migration continues and remote work enables relocation
Current rental trends and opportunities in California
Understanding the rental market is crucial when selecting investment properties for your 1031 exchange. This analysis provides insights into current rental conditions across the state.
| Property Type | Avg. Rent | Vacancy Rate | Rent Trend | Cap Rate |
|---|---|---|---|---|
| Luxury Apartments | $3,200 - $4,500 (1BR) | 5.8% | stable | 3.0% - 4.0% |
| Class B Apartments | $2,400 - $3,200 (1BR) | 4.2% | up | 3.8% - 4.5% |
| Single Family Homes | $4,500 - $6,500 (3BR) | 3.5% | up | 3.2% - 4.0% |
San Francisco's rental market is dominated by tech professionals, with 55% of renters under 40 years old. The tech industry employs approximately 45% of renters. Average tenant income is significantly higher than the national average, supporting premium rents in desirable locations.
San Francisco has some of the strongest tenant protection measures in the nation, including rent control, just-cause eviction requirements, and significant relocation payment obligations. Short-term rental regulations are strict, with mandatory registration and limits on rental days.
San Francisco's rental market is stabilizing after pandemic-related disruption. Remote work has reduced demand in the urban core, but suburban areas are seeing strong performance. Rent growth is projected to remain positive but moderate as supply and demand reach equilibrium.
| Property Type | Avg. Rent | Vacancy Rate | Rent Trend | Cap Rate |
|---|---|---|---|---|
| Luxury Apartments | $2,800 - $3,800 (1BR) | 6.2% | stable | 3.5% - 4.2% |
| Class B Apartments | $2,000 - $2,800 (1BR) | 4.8% | up | 4.2% - 5.0% |
| Single Family Homes | $3,800 - $5,500 (3BR) | 4.0% | up | 3.8% - 4.5% |
Los Angeles' rental market reflects its diverse economy, with strong representation from entertainment, healthcare, and technology sectors. Approximately 48% of renters are under 35, and 30% have household incomes above $100,000. The market has a higher proportion of long-term renters compared to other major metros.
Los Angeles has rent control for properties built before October 1978 (with some exceptions) and just-cause eviction requirements. The city has implemented tenant protection measures, though these vary by municipality within the metro area. Short-term rental regulations require primary residence status and registration.
The Los Angeles rental market is projected to see continued strong performance, particularly in areas with improving transit infrastructure. New supply is substantial but generally in line with population growth. Rent growth is expected to remain positive but moderate from recent peaks.
| Property Type | Avg. Rent | Vacancy Rate | Rent Trend | Cap Rate |
|---|---|---|---|---|
| Luxury Apartments | $2,600 - $3,500 (1BR) | 5.2% | up | 3.8% - 4.5% |
| Class B Apartments | $1,900 - $2,600 (1BR) | 4.5% | up | 4.2% - 5.0% |
| Single Family Homes | $3,500 - $5,000 (3BR) | 3.8% | up | 3.5% - 4.2% |
San Diego's rental market is influenced by the military, biotech, and healthcare sectors. The market has a higher proportion of younger renters, with 50% under 35 years old. The presence of military personnel creates a stable tenant base in certain submarkets.
San Diego has fewer rental restrictions than San Francisco or Los Angeles but has been implementing more tenant protection measures in recent years. The city has enacted just-cause eviction requirements and is considering additional tenant protections. Short-term rental regulations vary by neighborhood.
San Diego's rental market is expected to remain strong due to limited housing supply, desirable climate, and growing employment sectors. Areas near biotech and research centers show the strongest growth potential. Rent growth is projected to continue at above-average rates.
| Property Type | Avg. Rent | Vacancy Rate | Rent Trend | Cap Rate |
|---|---|---|---|---|
| Luxury Apartments | $1,900 - $2,600 (1BR) | 4.8% | up | 4.5% - 5.2% |
| Class B Apartments | $1,500 - $1,900 (1BR) | 4.2% | up | 5.0% - 5.8% |
| Single Family Homes | $2,500 - $3,500 (3BR) | 3.5% | up | 4.8% - 5.5% |
Sacramento's rental market is characterized by government employees, healthcare workers, and increasingly, remote workers from the Bay Area. The market has a balanced age distribution, with significant representation from families and young professionals.
Sacramento has fewer rental restrictions than coastal California cities but has implemented a rent cap limiting annual increases to 5% plus inflation. The city has also enacted just-cause eviction requirements. Short-term rental regulations are less restrictive than in coastal markets.
Sacramento is positioned for strong growth as Bay Area migration continues and remote work enables relocation from higher-cost markets. The market offers an attractive combination of yield and appreciation potential. Areas near major employers and with good school districts show the strongest appreciation potential.
Key mistakes to avoid in your 1031 exchange
California requires Form FTB 3840 for exchanges involving California properties for out-of-state properties, with ongoing annual filing until the deferred gain is recognized.
Work with a tax professional familiar with California's specific 1031 exchange requirements. Set calendar reminders for annual FTB 3840 filing obligations even after moving out of state.
While a 1031 exchange defers income taxes, it doesn't prevent property tax reassessment when acquiring a new property within California under Proposition 13.
Factor potential property tax increases into your financial projections when exchanging into California properties. Consider properties with existing tax bases that may be transferable under certain circumstances.
California has strong tenant protection measures, including rent control in many jurisdictions, just-cause eviction requirements, and significant relocation payment obligations.
Research local tenant protection laws before acquiring residential rental properties. Consider commercial properties or residential properties in areas with fewer restrictions if tenant regulations are a concern.
California imposes a 3.33% state tax withholding on the sale of real property, which applies to 1031 exchanges and can affect cash flow.
Plan for withholding requirements in your exchange timeline and cash flow projections. Work with your qualified intermediary to ensure proper documentation is filed to minimize withholding when appropriate.
Common questions about California 1031 exchanges
California generally conforms to federal 1031 exchange rules for real property. However, California continues to allow personal property exchanges for individuals with adjusted gross income under $250,000 (or $500,000 for joint filers), which differs from federal rules that limit exchanges to real property only.
You need to file federal Form 8824 (Like-Kind Exchanges) with your federal tax return. If you're exchanging California property for out-of-state property, you must also file California Form FTB 3840 for the year of the exchange and each subsequent year until the deferred gain is recognized.
Yes, key considerations include California's high state income tax rates (up to 13.3%), the requirement to file Form FTB 3840 for out-of-state exchanges, property tax reassessment under Proposition 13, and strong tenant protection laws for residential rental properties.