1031 Exchange in California

By Skyline Capital Investments · Updated October 26, 2026 · 7 min read

Does California recognize 1031 exchanges?

Yes. California conforms to Internal Revenue Code Section 1031 for exchanges of real property, so a sale that qualifies federally also defers your California income tax. Since California taxes gains at up to 13.3%, the state deferral is often worth as much as a third of the total tax you put off.

California’s conformity date is January 1, 2025, and for tax years beginning on or after that date it follows the federal rule that only real property qualifies. Before then, some California taxpayers could still exchange personal property under older state rules; that option is gone. In an apartment sale, appliances, furniture and other personal property sold with the building are not part of the exchange, so allocate them carefully in the purchase contract.

California 1031 exchange rules that differ from federal rules

The federal deadlines, identification rules and like-kind test all apply unchanged in California: 45 days to identify, 180 days to close, and any U.S. real property held for investment counts as like-kind. Our 1031 exchange rules page covers those in detail. What California adds are three things.

Form 593 withholding in a California 1031 exchange

In a normal California sale over $100,000, escrow withholds 3 1/3% of the sales price for the Franchise Tax Board. In a deferred 1031 exchange, the seller certifies the exchange on Form 593 (Part IV, line 10) and nothing is withheld when the relinquished property closes.

The duty then moves to the qualified intermediary. If the intermediary pays you more than $1,500 in boot, it must withhold 3 1/3% of the boot, or use the alternative calculation based on the gain the boot triggers. If the exchange fails, for example because you miss the 45-day or 180-day deadline, the intermediary withholds 3 1/3% of the full sales price, or the gain-based amount, minus any boot withholding it already sent. Since 2022, a QI in a cash-poor exchange is limited to the funds it actually holds and must document that on Form 593.

The withheld amount reaches the FTB by the 20th day of the month after the payment, and you claim it as a credit on your California return. A simultaneous exchange works the same way, except escrow withholds on any money or property you take outside the exchange above $1,500.

The FTB 3840 clawback when you buy outside California

California keeps the right to tax gain on California property you exchange into another state. If you sell a building in Los Angeles and buy one in Texas, the gain you deferred is still California-source income, and California will tax it when you eventually sell the Texas property in a taxable sale.

To track it, you must file Form FTB 3840 for the year of the exchange and every year after until the deferred California gain is recognized. The rule applies regardless of where you live, and it covers individuals, trusts, partnerships, LLCs and corporations; a disregarded LLC’s owner files. The form reports the exchange details from federal Form 8824, the California adjusted basis and the deferred California-source gain.

If you stop filing and also don’t file a California return, the FTB may issue a notice of proposed assessment, estimate your income and assess tax, penalties and interest. When the replacement property is finally sold in a taxable sale, you file a last FTB 3840 with a statement showing the gain recognized.

California is not the only state with a rule like this, but it is the one most sellers run into. An exchange from California into another California property needs no FTB 3840 at all.

Does California regulate qualified intermediaries?

Yes. California’s exchange facilitator law, Financial Code section 51000 and following, sets rules for anyone who holds exchange funds for a California exchange. SB 139 in 2013 removed the law’s sunset date, so it is permanent.

An exchange facilitator must keep a fidelity bond of at least $1 million, or deposit $1 million, or hold all exchange funds in a qualified escrow or trust account that needs dual authorization to move money. It must also carry at least $250,000 of errors and omissions coverage. Ask your intermediary for proof of both before you sign the exchange agreement.

Nine states have a qualified intermediary law: California, Colorado, Connecticut, Idaho, Maine, Nevada, Oregon, Virginia and Washington. Our guide to choosing a 1031 qualified intermediary covers what else to check.

Common exchange paths for California owners

Most California exchanges follow one of a few patterns, and each has a different state paperwork load.

• California to California: no FTB 3840 filing, and the deferred gain stays inside the state’s normal rules. Common for owners trading up from a coastal building to a larger one in the Inland Empire or Sacramento.
• California to a no-income-tax state such as Texas, Nevada or Florida: popular for the lower ongoing tax on rent, but it triggers the yearly FTB 3840 filing and California still taxes the deferred gain on a later sale.
• California into a Delaware statutory trust: a passive option for owners who want out of management; a DST holding out-of-state property also triggers FTB 3840.
• Partial exchange: you take some cash, which is boot. The QI withholds 3 1/3% of boot over $1,500, and that part of the gain is taxed in the year of sale.
• Reverse exchange: you buy the replacement first through an exchange accommodation titleholder, which helps in tight California markets where good replacements go fast.

Worked example: a California exchange into Texas

A married couple in San Diego County sells a 12-unit building for $2,000,000 in 2026. Their adjusted basis is $800,000 and selling costs are $100,000, so their gain is $1,100,000. They exchange into a $2,300,000 apartment building in the Dallas area through a qualified intermediary and reinvest all the cash.

At closing, escrow withholds nothing, because they certify the deferred exchange on Form 593. The full $1,100,000 gain is deferred for both California and federal tax. From 2026 on, they file Form FTB 3840 every year, showing $1,100,000 of deferred California-source gain.

Suppose they move to Texas and sell the Dallas building years later in a taxable sale. California taxes the $1,100,000. Run through the 2025 joint schedule as if it were their only income, the California tax alone would be about $101,800, including the 1% on income over $1 million. As nonresidents with other income, their actual rate could be higher.

If instead they had taken $200,000 out as boot, the intermediary would have withheld $6,667 (3 1/3% of $200,000) and that $200,000 of gain would be taxed in 2026. If they had missed the 180-day deadline, the QI would have withheld $66,667, which is 3 1/3% of the $2,000,000 price.

A 1031 exchange does not protect your Prop 13 base

An exchange defers income tax only. For property tax, the sale of your old building and the purchase of the new one are both changes in ownership, so a California replacement property is reassessed at its purchase price, and the low base year value you built up on the old building is gone.

This catches owners who trade up inside California. Swapping a long-held building assessed at $900,000 for a $2,300,000 replacement can more than double the property tax bill, even though the income tax is fully deferred. Factor that into the replacement’s numbers before you identify it; our page on the property tax rate in California shows how to estimate the new bill by county.

Timing a California exchange around tax deadlines

The 180-day exchange period ends on the earlier of 180 days after the sale or the due date, with extensions, of your federal return for the year of the sale. A California owner who sells in late fall and files on April 15 without an extension can lose weeks of the exchange period, so extend the return if the replacement closing may run past that date.

California follows the same exchange period, and the FTB 3840 for the exchange year goes in with your California return. For a 2026 exchange by an individual, that return is due April 15, 2027, or October 15, 2027 on extension. Partnerships and S corporations have earlier due dates, so an LLC that owns the building should plan its filings with its CPA as soon as the replacement closes.

Selling into a 1031 exchange with Skyline

Skyline buys apartment buildings with five or more units in California, and many of our sellers are heading into an exchange. We buy directly, close on your timeline, and can work inside 1031 deadlines. We can push closing back to give you time to find a replacement before day 45 starts, and we work with your intermediary on the Form 593 certification. For the federal side, see our 1031 exchange hub and the 1031 exchange rules page; for the state income tax on a sale without an exchange, see California capital gains tax on real estate.