1031 Exchange California Made Simple
Keep more of your money working for you. ALT Financial helps you defer taxes and grow smarter with trusted 1031 exchange services.
What Is a 1031 Exchange in California?
A 1031 exchange in California is a tax strategy that lets you sell one investment property and use the money to buy another without paying capital gains tax right away. Instead, the tax is delayed. That gives you more funds to reinvest and more room to grow your portfolio.
The rules come from Section 1031 of the IRS code. California follows those rules but adds its own layer of reporting. The state requires investors to keep track of deferred gains with the Franchise Tax Board (FTB).
This tool has been around for decades. Real estate owners use it to build larger portfolios, shift money between properties, and protect long-term wealth.
How a California 1031 Exchange Works
The process is simple on paper, but the deadlines are strict. Here are the four main steps:
- Sell your property – It must be used for business or investment. Personal homes do not qualify.
- Use a Qualified Intermediary (QI) – The QI holds the sales money. You cannot touch the funds yourself.
- Identify a new property – You have 45 days to name up to three possible properties.
- Close the deal – You must buy the replacement property within 180 days.
If you miss either deadline, the IRS will treat the sale as taxable. Timing is everything in a 1031 exchange.
California’s Extra Rules
California honors the federal exchange but adds its own rules. You must:
- File Form FTB 3840 each year to report deferred gains.
- Keep reporting gains even if the new property is outside California.
- Pay state taxes when you finally sell without reinvesting.
This is known as the “California clawback rule.” In short, you can move money out of the state, but you cannot escape California’s tax reach.
Benefits of a 1031 Exchange in California
Why do investors use this strategy? The benefits are clear:
- Tax deferral – Put all of your proceeds back to work instead of paying the IRS now.
- Portfolio growth – Trade up from smaller rentals to larger, higher-income properties.
- Diversification – Spread risk by turning one property into several.
- Geographic flexibility – Sell in high-cost areas like San Francisco or Los Angeles and buy in markets with better returns.
- Estate planning – Heirs receive a step-up in basis, which often wipes out the deferred tax bill.
Because of these benefits, many investors use the 1031 exchange as part of a long-term wealth plan.
Ready to Defer Taxes and Reinvest More?
ALT Financial makes the 1031 Exchange Rule in California clear and simple. We manage the deadlines, the filings, and the details so you can focus on your investments.
Risks and Pitfalls
The 1031 exchange is powerful, but mistakes are common. Be aware of these risks:
- Depreciation recapture – If the deal is not structured correctly, the IRS may tax past depreciation you claimed.
- Vacation homes – Personal-use properties rarely qualify unless they follow strict IRS rental-use rules.
- Deadlines – The 45-day and 180-day timelines are absolute. Missing them ends the exchange.
- Partial exchanges – If you receive cash or reduce debt, that part becomes taxable.
- California clawback – Even if you reinvest out of state, California still tracks deferred gains and will tax you later.
Knowing these pitfalls upfront helps you avoid surprises.
Strategies for California Investors
Investors use the exchange in different ways. Here are a few common strategies:
- Consolidation – Trade several small rentals for one larger, easier-to-manage property.
- Diversification – Swap one high-value property for multiple smaller properties in different markets.
- Relocation – Sell in California and reinvest in states with lower costs and better yields.
- Legacy planning – Use the 1031 Exchange 5y Rule to hold property long enough to pass tax benefits to heirs.
Each approach has its own benefits. The right choice depends on your goals.
Work With California’s Trusted 1031 Exchange Company
ALT Financial is not just a Qualified Intermediary. We are a full-service 1031 Exchange Company. Our team secures your funds, provides expert guidance, and ensures compliance with both IRS and California rules. We make the exchange process safe and stress-free.
FAQs
Does California have special 1031 Exchange rules?
Yes. You must file Form FTB 3840 to report deferred gains. California collects its share when you sell without reinvesting.
How much time do I have to finish an exchange?
You have 45 days to identify new property and 180 days to close the deal.
Can I buy property outside California?
Yes, but California still tracks deferred gains and may tax you when the gain is recognized.
Why work with a 1031 Exchange Company in California?
A firm like ALT Financial keeps your money secure, manages timelines, and ensures you follow the rules.
Do vacation homes qualify?
Most do not. Only properties that meet IRS rental-use guidelines may qualify.