1031 Exchange Rules in California – What You Need to Know

California’s 1031 exchange rules are anything but straightforward, and they keep changing. To make smart real estate transactions, understanding them is crucial. Here’s a comprehensive overview of the 1031 exchange rules along with practical tips to help you navigate the process.

What is a 1031 Exchange?

A 1031 exchange, also called a like-kind exchange, allows you to swap one real estate investment property for another—deferring capital gains taxes in the process. Named after Section 1031 of the Internal Revenue Code (IRC), this strategy is widely used by investors, real estate agents, and title companies.

By reinvesting proceeds from a sold property into a like-kind property, you postpone paying capital gains tax. For investors, this is an effective way to grow their portfolio through continuous reinvestment.

Rules for 1031 Exchange in California

• The new investment property must be like-kind to the one being sold. Most business or investment real estate qualifies regardless of quality.
• Both properties must be located in the United States.
• Primary residences or vacation homes do not qualify.
• The replacement property must be of equal or greater value than the one sold.
• The exchange must involve only like-kind property; no cash, stocks, or other forms of payment are allowed. Any difference in value must be paid in cash by the investor.

Why You Need a Qualified Intermediary

A Qualified Intermediary (QI) is essential for executing a valid 1031 exchange. As a neutral third party, the QI holds the sale proceeds and uses them to purchase the replacement property. The investor is not allowed to access the funds directly—doing so invalidates the exchange.

Choose a reliable and experienced 1031 exchange agency. The QI will:

• Prepare all required legal documents
• Hold proceeds in a secure escrow account
• Ensure IRS rules are followed during the transaction

What Is the Exchange Timeline?

Time limits are strict under the 1031 exchange rules:

• 45 Days: From the sale of the original property, you must identify one or more replacement properties within 45 days.
• 180 Days: The exchange must be completed within 180 days after selling the original property or by the due date of your tax return (including extensions), whichever comes first.

Missing any deadline disqualifies the exchange and triggers capital gains taxes.

Taxes Involved in a 1031 Exchange

To fully defer capital gains taxes, follow these financial guidelines:

• Reinvestment Requirement: The replacement property’s purchase price must be equal to or greater than the relinquished property’s sale price.
• Equity Reinvestment: All equity from the sale must be reinvested. Retaining cash will result in taxable gains.
• Debt Replacement: Debt on the new property must match or exceed the debt on the old property. Cash can be used to compensate for any shortfall in debt—but not the other way around.

Call the Experts

A 1031 exchange is a powerful tax-deferral strategy for real estate investors looking to build long-term wealth. But due to its complexity and strict IRS requirements, it’s important to work with a team that understands the ins and outs of real estate finance and property law.

ALT Financial is a full-service firm specializing in 1031 exchanges across California. Our experienced advisors provide end-to-end support—from identifying suitable like-kind properties to coordinating with a Qualified Intermediary and managing timelines to ensure compliance.

We’re not just a 1031 exchange service provider. As a trusted Refinance broker and CRE mortgage specialist, we can help you align your investment goals with broader financial strategies—whether that means refinancing an existing property or expanding your commercial real estate portfolio.

Let ALT Financial guide you through your 1031 exchange with confidence. Get in touch today to learn how we can help you defer taxes, grow your portfolio, and make the most of your real estate investments.