California 1031 Exchange
Last reviewed: August 2026. Rules change. Verify current forms before closing.
California 1031 Exchange: The Highest Stakes in the Country
A 1031 exchange lets you sell an investment property and buy another without paying tax on the gain right away. Nowhere does that matter more than California.
California taxes capital gains as ordinary income at rates reaching 13.3%. It withholds money at closing before you ever see the proceeds. If you then buy replacement property in another state, it tracks your deferred gain every year afterward, through a filing most investors have never heard of.
A properly handled California 1031 exchange defers all of it. A careless one can cost you the deferral, tie up cash at closing, or produce an assessment years later.
We are an attorney-owned qualified intermediary. For most delayed exchanges, a qualified intermediary is the standard safe harbor used to hold the proceeds so you never receive or control them. California places extra penalty exposure on intermediaries, which is a good reason to look closely at who is holding your money here.
California 1031 Exchange at a Glance
| Question | California answer |
|---|---|
| Does California conform to IRC 1031? | Yes, for real property |
| State tax on the gain | Ordinary income rates to 12.3%, plus 1% above $1 million taxable income |
| Withholding at closing | Yes. 3 1/3% of sales price unless exempted. |
| Exchange exemption form | Form 593 |
| Claw-back or annual reporting | Yes. Form FTB 3840, every year you hold out-of-state replacement property. |
| Transfer tax | Local documentary transfer taxes may apply. Confirm with escrow. |
| Identification deadline | 45 days (federal) |
| Completion deadline | Earlier of day 180 or your return due date with extensions (federal) |
| WealthBuilder flat fee | $1,000 |
What a California 1031 Exchange Costs
A standard delayed exchange costs a flat $1,000. You pay $750 at the sale closing and $250 at the replacement purchase closing. We take no percentage of your proceeds.
That fee covers your exchange documents and direct coordination with your escrow officer, lender, and tax advisor. Reverse and improvement exchanges take more work, so we quote those individually.
Your funds sit in segregated accounts at an FDIC-insured institution, with deposit insurance coverage of up to $240 million per account. Every transaction requires dual authorization.
What a California 1031 Exchange Defers
Say you sell a Los Angeles apartment building for $1,000,000. You bought it for $600,000 and took $100,000 of depreciation. Your adjusted basis is $500,000, so your gain is $500,000.
| Tax | Maximum-rate illustration | Amount |
|---|---|---|
| Unrecaptured Section 1250 gain | up to $100,000 x 25% | $25,000 |
| Long-term capital gain | up to $400,000 x 20% | $80,000 |
| Net investment income tax | up to $500,000 x 3.8% | $19,000 |
| California income tax | $500,000 at up to 13.3% | up to $66,500 |
| Total potential tax | up to $190,500 |
This table shows a maximum-rate illustration, not a calculation of what any particular investor owes. Your rates depend on income, filing status, and basis. The net investment income tax applies based on your net investment income and modified adjusted gross income, so it may not reach the whole gain.
California is a third of that total on its own. A qualifying exchange may defer the entire amount.
How California Taxes Your Property Sale
Rate: up to 13.3%. California taxes capital gains as ordinary income rather than at a preferential rate. The regular top individual rate is 12.3%. An additional 1% Behavioral Health Services Tax applies to taxable income above $1 million, which is where the 13.3% figure comes from. The table above uses that maximum, so it assumes a taxpayer already above the $1 million threshold. A single large gain can also push you into a higher bracket for the year.
Conformity: yes. California follows the federal like-kind exchange rules for real property. If the exchange qualifies federally, California defers its tax too.
But deferral is not forgiveness, and California means that literally. The state treats gain accrued on California property as California-source income permanently, regardless of where you or the replacement property end up.
Withholding at Closing, and Form 593
California requires withholding on most real estate sales, from residents and nonresidents alike. The default is 3 1/3% of the total sales price, not of the gain. Sales of $100,000 or less are exempt.
On a $1,000,000 sale, escrow holds back $33,300 unless you certify an exemption. That is money sitting with the state instead of working in your exchange.
The exemption runs through Form 593, the Real Estate Withholding Statement, where you certify that the transfer is part of a like-kind exchange. It must reach escrow or your qualified intermediary before closing.
Two events can still produce withholding during the exchange process. Boot over $1,500 must be withheld on. And if the exchange fails to complete within the deadlines, the intermediary must withhold before releasing funds.
Withholding is not a separate tax. It is a prepayment credited against your California return. Avoiding it simply keeps your full equity working in the exchange.
We prepare the exchange documentation and provide the information your escrow officer and tax professional need to complete California's forms. Your tax professional files them.
The Claw-Back: Form FTB 3840
This is the rule that catches the most people, usually years later.
Exchange California property into replacement property outside California and the deferred gain remains California-source income. The state does not lose its claim because you bought in Texas.
The tracking mechanism is Form FTB 3840. You file it for the year of the exchange and every year afterward, for as long as you hold that out-of-state property. The obligation continues even if you have left California and file no other return there.
Stop filing and the Franchise Tax Board may estimate your income and assess tax on the entire deferred gain, plus penalties and interest.
In a simple one-property exchange the annual filing is manageable. Forgetting it is expensive. Multiple replacement properties and later exchanges can make the filing more involved. Put it on your annual tax calendar, and make sure any new CPA learns the exchange history when you switch preparers.
Keep exchanging and the gain stays deferred. California generally collects when the deferred gain is recognized in a taxable transaction. A basis adjustment at death may eliminate some or all of the built-in gain, depending on ownership structure and your estate plan. That is a conversation for your estate planning attorney.
A worked example. You sell a San Diego duplex and buy a Dallas industrial building. Federal and California tax defer. From that year forward you file FTB 3840 annually. Ten years later you sell the Dallas building for cash. Texas takes nothing. California taxes the original California gain.
The Federal Rules That Do Not Change
You have 45 days from the day your sale closes to identify replacement property in writing. The identification must be signed and must describe the property unambiguously.
Deliver it to your qualified intermediary or another permitted party involved in the exchange. Do not assume that sending it only to your own attorney, accountant, broker, or agent satisfies the rule. Many of those advisors are disqualified recipients because of their relationship to you.
Three rules govern how much you may identify. Under the three-property rule, you may identify up to three properties at any value. Under the 200% rule, you may identify any number of properties as long as their combined fair market value does not exceed 200% of what you sold. Under the 95% rule, you may exceed both limits only if you actually acquire at least 95% of the value you identified.
Most investors use the three-property rule. Identify more than you need, then close on the one that works.
You generally have 180 days from the sale closing to acquire replacement property. The actual deadline is the earlier of day 180 or the due date of your federal income tax return for the year of the sale, including extensions.
Filing your return early does not shorten the exchange period. Failing to extend it can. If your normal return due date arrives before day 180, file an extension before that due date. The IRS also grants limited deadline relief after presidentially declared disasters.
California Property That Qualifies for a 1031 Exchange
We act as qualified intermediary across California investment real estate. That includes multifamily and apartment buildings, retail and shopping centers, office and medical office, industrial and warehouse, self-storage, single-tenant net-lease, mixed-use, raw land held for investment, and 1 to 4 unit rentals.
Property held for investment or business use generally qualifies. Primary residences and properties bought to flip generally do not.
How to Start Your California 1031 Exchange
- Call 888-508-1901 before your sale closes. The exchange must exist before closing. Nobody can fix it afterward.
- We prepare your exchange agreement and the documentation supporting your Form 593 certification, and we coordinate with escrow so proceeds go straight to your segregated account.
- You identify within 45 days and close within the period described above. We track both dates with you.
- We release funds only for qualified replacement property, and we provide your tax professional the records California reporting requires.
California 1031 Exchange Risks Worth Knowing
Missed FTB 3840 filings. The most common long-tail failure. The FTB can assess tax on the full deferred gain.
Boot surprises. Cash taken at closing, debt not replaced, or non-qualifying property received creates recognized gain, triggers withholding, and shrinks the deferral.
Withholding on the wrong base. Sellers sometimes let escrow withhold 3 1/3% of the full price when an exemption or gain-based election applied. Recovering it means waiting on a refund.
Failed deadlines. The federal clock applies with no California extension.
Deferral is not elimination. California collects when you cash out. Plan the exit, not just the exchange.
When a California 1031 Exchange May Not Be the Right Call
Deferring tax is not automatically the best outcome. An exchange may be wrong if the replacement property is a weaker investment than the cash, if you need most of the proceeds, if the gain is modest, or if a basis step-up is already the better plan. In California the annual filing obligation is itself a cost worth weighing on a small gain.
WealthBuilder 1031 acts solely as your qualified intermediary. We do not provide tax, legal, or investment advice, and we do not sell investments or securities.
1031 Exchange Activity Across California
Investors run exchanges across California, from Los Angeles and San Diego to San Francisco, San Jose, and Sacramento. Replacement property commonly includes multifamily, retail, industrial, and net-lease assets, along with Delaware Statutory Trust (DST) interests for investors who want a hands-off option.
Many California owners reinvest out of state, and the key point is California's claw-back: once you exchange into out-of-state property, Form FTB 3840 must be filed every year until you sell, or the state can tax the deferred gain. California also withholds at closing (Form 593), which a valid exchange generally exempts. We coordinate both with your CPA.
Why Investors Choose WealthBuilder 1031
- Attorney-owned qualified intermediary
- Flat $1,000 standard delayed-exchange fee
- Segregated exchange accounts
- Dual authorization on every transaction
- Direct coordination with your title company, CPA, and attorney
- Deferred, reverse, improvement, and simultaneous exchanges
Frequently Asked Questions
How much does a 1031 exchange cost in California?
A flat $1,000 for a standard delayed exchange, $750 at the sale closing and $250 at the purchase closing.
Does California tax a 1031 exchange?
California defers the gain in a properly structured exchange, as the IRS does. It taxes capital gains as ordinary income at up to 13.3%, withholds at closing, and requires annual reporting when you exchange out of state.
How do I avoid the 3 1/3% withholding?
Certify the exchange on Form 593 before closing. Boot over $1,500 and failed exchanges still trigger withholding.
What is Form FTB 3840 and how long do I file it?
It reports a like-kind exchange of California property into out-of-state property. You file it for the exchange year and every year you hold the replacement property.
I moved out of California. Do I still file?
Yes, for as long as you hold the replacement property, even with no other California filing obligation.
Can I exchange California property for property in another state?
Yes, anywhere in the United States. The claw-back reporting follows.
Do I still need a qualified intermediary?
For most delayed exchanges, a qualified intermediary is the standard structure used to keep you from receiving or controlling the sale proceeds, and the choice of intermediary matters more here: California places penalty exposure on intermediaries that mishandle withholding. Touch the proceeds yourself and you lose the deferral, in any state.
Sources
- IRS, Like-Kind Exchanges, Real Estate Tax Tips
- IRS, Instructions for Form 8824
- 26 CFR 1.1031(k)-1, deferred exchanges
- California FTB, Instructions for Form 593
- California FTB, Reporting like-kind exchanges
- California FTB, Capital gains and losses
1031 Exchange Services Across California
WealthBuilder 1031 serves real estate investors throughout California, including Alameda, Aliso Viejo, Anaheim, Angwin, Aptos, Arcata, Atherton, Azusa, Bakersfield, Barstow, Belmont, Blue Lake, Burbank, Calexico, Camarillo, Carlsbad, Carson, Chico, Chula Vista, Claremont, Coalinga, Compton, Costa Mesa, Culver City, Cupertino, Cypress, Davis, El Cajon, El Segundo, Emeryville, Eureka, Fairfield, Fountain Valley, Fremont, Fresno, Fullerton, Glendale, Glendora, Hayward, Hesperia, Hollywood, Huntington Beach, Imperial, Irvine, Joshua Tree, Kentfield, La Jolla, La Mirada, La Verne, Laguna Beach, Lancaster, Lemoore, Livermore, Long Beach, Los Altos Hills, Los Angeles, Malibu, Marysville, Merced, Mission Viejo, Modesto, Monrovia, Monterey Park, Monterey, Moorpark, Moraga, Moreno Valley, Napa, Norco, North Hollywood, Northridge, Norwalk, Oakland, Oceanside, Ontario, Orange, Oroville, Oxnard, Palm Desert, Pasadena, Pittsburg, Pleasant Hill, Pomona, Porterville, Quincy, Rancho Cordova, Rancho Cucamonga, Rancho Palos Verdes, Redding, Redlands, Redwood City, Reedley, Ridgecrest, Riverside, Rocklin, Rohnert Park, Rosemead, Sacramento, Salida, Salinas, San Bernardino, San Bruno, San Diego, San Dimas, San Francisco, San Jacinto, San Jose, San Luis Obispo, San Marcos, San Mateo, San Pablo, San Rafael, Santa Ana, Santa Barbara, Santa Clara, Santa Clarita, Santa Cruz, Santa Maria, Santa Monica, Santa Paula, Santa Rosa, Saratoga, Seaside, Signal Hill, Sonora, South Lake Tahoe, Stanford, Stockton, Sunnyvale, Susanville, Sylmar, Taft, Tarzana, Temecula, Thousand Oaks, Torrance, Turlock, Ukiah, Valencia, Vallejo, Valley Glen, Van Nuys, Ventura, Victorville, Visalia, Walnut, Weed, West Covina, Whittier, Wilmington, Woodland Hills, Woodland, and Yucaipa.
Do not see your city? We serve investors statewide. Call 888-508-1901 to start your California exchange.
This page does not constitute legal or tax advice. Consult your attorney and tax advisor about your specific situation.
