Like-Kind Exchange (1031 Exchange)

The Core Concept

In a normal real estate sale, you pay capital gains tax on the gain above your basis. In a 1031 exchange, you reinvest the proceeds into a new property and defer that tax — preserving more capital for reinvestment. California conforms to federal 1031 rules, so state capital gains can also be deferred.

Key Requirements

• Both the sold property (relinquished) and acquired property (replacement) must be held for investment or productive use in a trade or business — not for personal use
• Both must be real property (personal property exchanges no longer qualify after 2017)
• A Qualified Intermediary (QI) must hold the proceeds — you cannot receive the funds yourself
• Replacement property must be identified within 45 days of the sale closing
• Exchange must close within 180 days of the sale closing

What Qualifies as 'Like-Kind'

For real estate, like-kind is broadly defined. An apartment building can be exchanged for a retail center; California farmland for Texas industrial. The exchange does not have to be same-type — just real property for real property.

California Clawback

California requires annual information returns (FTB Form 3840) if you exchange California property for out-of-state property. California retains the right to tax the deferred California-sourced gain when the out-of-state property is eventually sold.