California real estate investors face some of the highest capital gains taxes in the country. A 1031 exchange—named after Section 1031 of the Internal Revenue Code—remains one of the most powerful tools for deferring those taxes when selling investment property. However, CA 1031 exchange rules include state-specific requirements and new considerations for 2025 that every property owner must understand before initiating a transaction.
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TLDR Quick Guide
- Federal & State Alignment: CA follows federal 1031 exchange rules, with added state-level tracking.
- Strict Timelines: You have 45 days to identify a property, 180 to close.
- Like-Kind Property Rule: Must exchange investment or business real estate only.
- Clawback Rule Applies: CA may tax future out-of-state gains.
- New in 2025: Increased scrutiny on “related party” transactions and multi-asset exchanges.
Key CA 1031 Exchange Rules in 2025
1. Eligibility Requirements
- Only real property held for investment or business purposes qualifies.
- Personal residences, fix-and-flips, and dealer property are excluded.
- Like-kind now refers strictly to real estate for real estate (no longer applies to personal property or mixed assets).
2. The 45-Day / 180-Day Timeline
- 45 Days: From the sale of your relinquished property, you must identify replacement properties in writing.
- 180 Days: You must close on one (or more) of the identified properties within 180 calendar days.
Pro Tip: Miss either deadline, and the entire exchange fails—triggering immediate capital gains tax.
3. Qualified Intermediary (QI) Requirement
Funds from the sale must never touch your hands. A Qualified Intermediary must hold the proceeds and facilitate the exchange legally.
4. California’s Clawback Provision
If you sell California property and use a 1031 exchange to buy out-of-state real estate, the state tracks the deferred gain. When you sell the replacement property later, California may require you to file and pay state taxes on the original deferred gain—even if you no longer reside in CA.
5. New Compliance Considerations in 2025
a. Increased Scrutiny on Related Party Transactions
Exchanging with family members or business entities now requires a 2-year minimum hold period to avoid disqualification. The IRS and California Franchise Tax Board are auditing more of these transactions in 2025.
b. Multi-Asset Property Exchanges Require Allocation
If a property includes both real estate and personal property (e.g., furniture, solar panels), only the real estate portion qualifies. Accurate valuation is critical.
c. Green Energy & Tax Credit Conflicts
Homes with solar or green tax incentives may create reporting overlaps with 1031 exchanges. Consult a tax advisor to avoid conflicts with federal and state incentives.
What Happens if You Don’t Follow the Rules?
Failing to meet 1031 requirements leads to:
- Immediate recognition of capital gains (up to 37% federal + 13.3% California)
- Ineligibility for future exchanges
- Interest and penalties if state clawback rules are ignored
Key Takeaways
- California adheres to federal 1031 rules but adds unique reporting and tax tracking.
- The clawback rule can trigger deferred tax years later, even on out-of-state properties.
- 1031 timelines (45-day ID, 180-day close) are non-negotiable.
- Related-party deals and personal property allocations are under tighter scrutiny in 2025.
- Always work with a qualified intermediary, real estate attorney, and tax professional.
FAQs
1. Can I exchange a rental property in California for one in Texas?
Yes—but CA will track the deferred gain. If you sell the TX property later, you may owe CA taxes on the original gain.
2. What if I miss the 45-day deadline?
The entire exchange fails. You’ll owe capital gains tax on the original sale, regardless of intentions.
3. Can I exchange multiple properties for one larger one?
Yes. That’s called a “consolidation exchange” and is allowed if all properties meet 1031 requirements.
4. Do I pay tax when I eventually sell the replacement property?
Yes—unless you complete another 1031 exchange or your heirs inherit it with a stepped-up basis.
5. Does California recognize 1031 exchanges completed out of state?
Yes—but they will require tracking and may pursue deferred tax via the clawback rule when the final sale occurs.