California 1031 Exchange & Investment Advisors

1031 Exchange in California

California real estate investors face some of the steepest capital gains exposure in the country. The state’s top income tax rate of 13.3% applies to investment gains with no preferential treatment for long-term capital gains, and when combined with federal rates, high-earning investors can face a combined rate exceeding 37%. That makes tax deferral strategies not just useful but essential for anyone selling appreciated property. A 1031 exchange is the most direct way to defer that liability and stay invested in real estate.

We work with California property owners from Los Angeles to San Francisco to Sacramento, helping them structure exchanges, evaluate DST and TIC replacement properties, and navigate the California-specific rules that can complicate an otherwise straightforward transaction.

A 1031 exchange allows California investors to sell an investment property and roll the proceeds into a like-kind replacement without paying capital gains tax in the year of sale. The exchange is governed by Section 1031 of the Internal Revenue Code, with strict timelines: 45 days to identify a replacement property and 180 days to close. The full rules and requirements are worth reviewing before you start the clock.

California adds a layer most states do not. Under Revenue and Taxation Code Section 18032, if you sell California property and purchase replacement property in another state, California treats the deferred gain as a continuing tax obligation. You are required to file Form 3840 with the Franchise Tax Board each year until you sell the replacement property, at which point California will collect its portion of the originally deferred gain. This clawback provision applies even though the replacement property is outside California, so investors considering an out-of-state exchange need to plan around it from the start.

Despite the clawback, the exchange still defers federal tax entirely, and the California obligation is deferred rather than eliminated until a future sale. Many California investors still find the deferral valuable, particularly when reinvesting in DSTs or TIC properties, where a step-up in basis at death can ultimately eliminate the remaining liability.

TIC Investments for California Investors

Tenants in Common, or TIC, is a co-ownership structure where multiple investors each hold a deeded fractional interest in a single property. TIC arrangements can serve as replacement property in a 1031 exchange, and they give investors access to larger TIC properties than they could typically acquire on their own.

California’s high property values and active investment market have historically made the state one of the stronger TIC markets in the country. Investors who own appreciated California real estate and want to move into fractional co-ownership without triggering a taxable event often find TIC structures an efficient fit. Reviewing TIC investments alongside DST investments can help clarify which structure better matches your passive income goals and timeline.

One California-specific consideration: if you are exchanging out of California into a TIC property located in another state, the Section 18032 clawback applies. California retains a claim on the deferred gain and requires annual Form 3840 filings until the replacement property is sold. Working with a qualified intermediary who understands California’s rules helps ensure you are not caught off guard at disposition.

DST Investments for California Investors

A Delaware Statutory Trust is a fractional ownership structure that allows investors to hold a beneficial interest in institutional-grade real estate, typically commercial properties, apartment complexes, or industrial assets, while still qualifying under IRS rules as like-kind replacement property in a DST 1031 exchange.

For California investors, DSTs are frequently used as replacement property in exchanges involving highly appreciated residential or commercial holdings. Because DST interests are passive and professionally managed, they eliminate the active landlord responsibilities that come with direct ownership, which is a meaningful practical benefit for investors ready to step out of day-to-day management while preserving the deferred gain. Anyone evaluating this path should understand the full range of Delaware Statutory Trust risks before committing, including liquidity limitations and the California clawback exposure if the DST holds assets outside the state.

DSTs require accredited investor status under SEC rules, and minimum investments typically range from $25,000 to $100,000 per offering, which allows investors with larger deferred gains to spread across multiple asset classes and geographies simultaneously.