1031 Exchange California: A Step-by-Step Guide
California has some unique considerations for 1031 exchanges that investors need to understand. Here's your complete guide.
Why California 1031 Exchanges Matter More
California has one of the highest capital gains tax rates in the country (up to 13.3% on long-term gains, taxed as ordinary income). Combined with federal capital gains tax (up to 20%) and depreciation recapture (25% federal), California investors can face total tax rates exceeding 40% without a 1031 exchange.
California's "Clawback" Rule
California has a unique rule: if you do a 1031 exchange to replace California property with out-of-state property, California can "clawback" the deferred state income taxes when you eventually sell the out-of-state replacement property (even if you've moved out of CA by then). This doesn't make out-of-state exchanges wrong — but it's critical to understand before exchanging CA property for Nevada, Texas, or Florida real estate.
Step-by-Step Process
- Decide to sell and engage a specialist broker (Samimi CRE Advisors)
- Set up your Qualified Intermediary before escrow closes
- Close on the relinquished property — the clock starts now
- Identify replacement properties within 45 days in writing to your QI
- Close on replacement property within 180 days
- File IRS Form 8824 with your tax return for the year of exchange
Samimi CRE Advisors has guided many LA County sellers through successful California 1031 exchanges. Contact us to get started.