Sell a California rental property and you'll owe federal capital gains tax (15-20%) plus California state tax (up to 13.3%).
On a $500,000 gain, that's $166,500 gone to taxes.
Or you can defer 100% of those taxes with a 1031 exchange.
Better Offers Inc (CA DRE #01212512) is a California mortgage broker. This guide explains common 1031 exchange financing considerations; consult a qualified tax professional and exchange intermediary about your transaction.
What Is a 1031 Exchange?
A 1031 exchange (IRS Code Section 1031) lets you sell an investment property and reinvest the proceeds into another "like-kind" property without paying capital gains tax.
Without 1031:
- Sell for $800K (basis $300K, gain $500K)
- Federal tax (20%): $100K
- CA state tax (13.3%): $66,500
- You keep: $633,500
With 1031:
- Sell for $800K, pay zero tax
- Reinvest the full $800K
That's $166,500 still working for you instead of the government.
Basic 1031 Rules
Like-kind property. Both properties must be real estate. A single-family rental can become an apartment building. California property can become out-of-state property. But you can't swap real estate for stocks or U.S. property for foreign property.
Investment or business use only. Your primary residence doesn't qualify. Neither do vacation homes you use personally or fix-and-flip properties held for quick resale. Both the property you sell and the one you buy must be held for investment or business.
Equal or greater value. To defer all gains, reinvest all proceeds into property of equal or greater value. Replace all debt (or add cash). If you don't, you'll pay tax on the difference — that's called "boot."
You can't touch the money. Sale proceeds go to a Qualified Intermediary (QI), not you. If funds hit your bank account, the exchange is dead.
The 1031 Timeline
This is where exchanges live or die.
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Day 0: You close on the sale. The clock starts.
Days 1-45: Identification period. You have exactly 45 calendar days to identify replacement properties in writing to your QI. You can name up to 3 properties. No extensions. Weekends and holidays count.
Days 1-180: Exchange period. You have 180 days (or your tax return due date, whichever comes first) to close on the replacement property.
Miss either deadline and the exchange fails. You'll owe taxes on the full gain.
Broker's Tip: Don't wait until day 44. Line up replacement properties BEFORE you sell. California's competitive market doesn't wait for your 1031 deadlines.
The Qualified Intermediary
You must use a QI. You can't hold the proceeds yourself. Your real estate agent, attorney, or CPA can't serve as QI if they've worked for you in the past 2 years.
QI fees: $800-$1,500 depending on the deal.
What the QI does:
- Holds sale proceeds in escrow
- Prepares exchange documents
- Wires funds when you close on the replacement
- Keeps the exchange IRS-compliant
Choose carefully. If your QI goes bankrupt, your exchange fails and you're out the money. Use an established firm with fidelity bond insurance.
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How to Structure a 1031 Exchange: Step-by-Step Process
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California 1031 Exchange: Tax Rules and Common Mistakes
California 1031 exchange tax implications: state capital gains, depreciation recapture, boot rules, and the 6 mistakes that kill exchanges.
What's Next
This covers the basics. For California-specific tax rules, depreciation recapture, and the mistakes that kill exchanges, read California 1031 exchange tax rules and common mistakes.
Ready to structure your exchange financing? See the step-by-step process.
Need help financing the replacement property?
Better Offers Inc | CA DRE #01212512
1031 exchange financing and strategy