1031 exchange guide · For rental and investment owners
Sell the rental. Keep your equity working.
A 1031 exchange lets you sell an investment property and roll the proceeds into another one without paying the capital gains tax right away. Here is how it works, what the deadlines are, and where California adds its own rules.
The name comes from Section 1031 of the Internal Revenue Code. In plain English, it says that if you sell an investment property and buy another one the right way, you can postpone the capital gains tax and the depreciation recapture tax that would normally come due at the sale. Your equity keeps working for you instead of going to the tax bill.
It is a deferral, not a tax free sale. The gain moves with you into the new property, and you can repeat the process again and again. Some owners keep exchanging for decades, and under current law their heirs may receive the property at a stepped up value after death. That is why it is a favorite tool for long term owners, and why it comes up so often with my clients who have owned a rental for many years.
Photo idea
A landlord and a CPA (certified public accountant) reviewing a sale contract and a laptop at a kitchen table.
Candid, natural light, not staged. 1000 x 750 px.
Plan first, list second. The most common 1031 mistake is calling an intermediary after closing. By then the money may have touched your hands, and the exchange is over. This conversation belongs before we put the sign in the yard.
What qualifies
Investment and business property, not your own home.
Since 2018, only real property qualifies. The test is how you use the property, not what it looks like. Both the property you sell and the property you buy must be held for investment or for use in a business.
Photo idea
A well kept South OC duplex or small apartment building in golden light.
Wide banner, 1600 x 600 px. Real property photography, no people needed.
Generally qualifies
Rental houses, condos, duplexes and apartment buildings.
Commercial, retail, office and industrial property.
Land held for investment.
Triple net lease (NNN) properties, where the tenant pays the taxes, insurance and upkeep.
Delaware Statutory Trust (DST) interests, a hands off option for investors who want to step back from managing property.
Generally does not qualify
Your own home. It has a separate tax break, the Section 121 exclusion, which can shield up to $250,000 of gain, or $500,000 for married couples filing jointly.
Homes you buy to fix and sell, because they are inventory.
Equipment, vehicles, art and other personal property.
U.S. property traded for property in another country.
Stocks, bonds and most partnership interests.
What about a vacation home? It can qualify only if it truly works as a rental. The IRS offers a safe harbor in Revenue Procedure 2008-16. In short, you owned it at least 24 months, rented it at fair rent for at least 14 days in each of the two 12 month periods before the exchange, and used it yourself no more than 14 days or 10 percent of the days rented, whichever is greater. A similar test applies for 24 months after you buy the replacement. Have your CPA confirm before you rely on it.
How it works
Six steps, in this order.
Call your CPA and a qualified intermediary before you list.
A qualified intermediary is a neutral company that holds your sale proceeds and prepares the exchange paperwork. It cannot be you, your relatives, or anyone who has recently acted as your agent, attorney or accountant, so I cannot serve as yours and neither can your CPA. Ask for a fee quote up front.
Sell the property you are giving up.
The sale contract should say you intend to complete a 1031 exchange. The net proceeds go from escrow straight to the intermediary. If the cash lands in your own account, even for a day, the exchange fails.
Identify your replacement property within 45 days.
The identification must be in writing, signed, and delivered to the intermediary by midnight on day 45. Counting starts the day after closing and includes weekends and holidays. There are three ways to name properties, shown below.
Close on the replacement within 180 days.
The 180 days run at the same time as the 45, not after them. If your tax return is due before day 180, that earlier date can become your deadline unless you file an extension. The tool below checks this for you.
Match or beat the property you sold.
To defer all of the gain, buy something worth at least as much as what you sold, reinvest all of your net equity, and take on at least as much debt, or add cash to make up the difference. Anything that falls short is called boot, and it is taxable.
Report it on your tax return.
Your CPA files Form 8824 with your federal return for the year of the sale. California owners who buy outside the state also file a California form every year, which I cover below.
Three ways to identify replacement property
Three property rule
Name up to three properties, at any price. Most owners use this one.
200 percent rule
Name any number of properties, as long as their combined value is no more than 200 percent of what you sold.
95 percent rule
Name as many as you like, but you must then buy at least 95 percent of the total value you named.
Interactive tool
Find your 45 day and 180 day deadlines.
Enter the date your sale closes. The tool counts the days for you, checks whether your tax return date cuts the 180 days short, and lets you save reminders to your calendar.
General counting tool, not tax advice. Day 1 is the day after your sale closes. Do not count on a weekend or holiday giving you extra time, and ask your intermediary to confirm your dates in writing. The tool assumes a calendar year individual taxpayer whose return is due April 15.
The tax picture
What is at stake on a $1.8 million rental.
Here is the math on a rental bought years ago for $600,000 and sold for $1,800,000, with $250,000 of depreciation taken along the way. The example uses top tax rates to show the size of the question. Many owners pay less, and your CPA can run your real numbers.
Sell and cash out
1031 exchange
Sale price
$1,800,000
$1,800,000
Selling costs, about 6%
$108,000
$108,000
Your basis ($600,000 paid, less $250,000 depreciation)
$350,000
$350,000
Taxable gain
$1,342,000
$1,342,000, deferred
Federal tax on depreciation recapture, up to 25%
$62,500
$0 now
Federal capital gains tax, 20% on the rest
$218,400
$0 now
Net investment income tax, 3.8%
$50,996
$0 now
California income tax, up to 13.3%
$178,486
$0 now
Tax due at the sale, about
$510,000
$0 now
Illustration only. The deferred gain does not disappear. Your new property takes on the old tax basis, and the tax comes due if you later sell without exchanging again. Under current law, property held until death generally receives a stepped up basis, which can erase the deferred gain for heirs, and Congress has discussed changes to these rules from time to time. Ask your CPA and an estate planning attorney how this works for your family.
California rules
Two things California owners should know.
Property tax
Your new property is reassessed
A 1031 exchange defers income tax. It does not carry your old Prop 13 (Proposition 13) property tax value to the new property. The replacement is reassessed at the price you pay, so build the new tax bill into your numbers. The Prop 19 (Proposition 19) move for homeowners 55 and older is a different rule for primary residences, and it does not apply to rentals.
Income tax
The California clawback
If you sell a California rental and buy out of state, California still wants its share of the deferred gain, even if you move away. You file Form FTB 3840 with the Franchise Tax Board for the year of the exchange and every year after, until the gain is finally recognized. Skipping the form can lead the state to estimate your income and assess tax, penalties and interest.
Keeping it in California keeps it simple. You can still exchange into another state, and many owners do for good reasons such as lower prices or no state income tax. Just go in knowing California keeps a claim on that gain, and put the yearly filing on your CPA's calendar.
Ways owners use it
Four common goals.
Move up
Trade up or trade sideways
Sell an older rental and buy a better located or newer one, with cleaner books, lower repairs, or stronger rent.
Simplify
Consolidate
Trade several small properties for one larger one, or the reverse, if you want to spread your equity across more than one market.
Step back
Stop being the landlord
Move into a triple net lease property or a Delaware Statutory Trust, where someone else handles tenants, repairs and calls at midnight.
Plan ahead
Think about your heirs
Some owners exchange for life and let their heirs receive a stepped up basis. It deserves a conversation with an estate planning attorney before it becomes the plan.
Where exchanges go wrong
Seven mistakes worth avoiding.
Touching the money. Proceeds must go to the intermediary, never to you.
Hiring the intermediary after closing. It has to be set up before the sale closes.
Missing the 45 days. The deadline is firm. A slow lender or a busy weekend does not move it.
Taking title in a different name. The taxpayer who sells should be the taxpayer who buys.
Leaving boot on the table. Buying less, borrowing less, or taking cash out creates a taxable piece.
Exchanging the wrong kind of property. Your own home and flips do not qualify.
Having no backup plan. If you identify nothing, the exchange ends and the sale is taxed.
Photo idea
An older couple walking a quiet South OC street, relaxed, in no hurry.
Candid lifestyle image, 1000 x 750 px.
Who does what
I am your Realtor, not your tax advisor. Here is the team.
A 1031 exchange touches tax law, contracts, lending and timing all at once. A good exchange has the right person on each piece, and I am happy to introduce you to professionals I trust.
CPA
Runs the numbers, confirms what qualifies, and files Form 8824 and the California form.
Qualified intermediary
Holds your sale proceeds and prepares the exchange documents.
Real estate attorney
Reviews contracts and entity or title questions before you sign.
Lender
Lines up financing for the replacement property so the debt side matches.
Title and escrow
Closes both sides and sends the proceeds where they must go.
Brandon Menchaca, Realtor
Prices and markets the sale, finds and tours replacement candidates, and keeps the calendar moving.
Common questions
What is boot?
Boot is any cash or non qualifying property you receive in the exchange, including debt relief when you take on less debt than you paid off. Boot is taxable up to the amount of your gain. Many owners accept a little boot on purpose, and your CPA can tell you what it would cost.
Can I do a 1031 exchange on my own home?
No. Your home has its own tax break, the Section 121 exclusion, and a different set of rules. If you are 55 or older and moving, my Prop 19 page covers the property tax side of a move.
What if I cannot find a property in 45 days?
The exchange ends, the intermediary returns your money, and the sale is taxed like any other sale. That is why many owners line up candidates and a backup before they list. A Delaware Statutory Trust is one common backup.
Can I buy the new property before I sell the old one?
Yes, with a reverse exchange under Revenue Procedure 2000-37. A third party holds one of the properties for you, and the same 45 and 180 day clocks apply. It costs more and has more moving parts, so plan it with your intermediary early.
Can I use the exchange money to improve the new property?
Yes, with an improvement exchange, sometimes called a build to suit exchange. The work must be finished and the improved property owned by you inside the 180 days, and the structure has to be set up before you close.
Do I owe the tax eventually?
If you sell the final property without exchanging again, the deferred gain comes due. Under current law, property held until death generally receives a stepped up basis, which can erase it for heirs. Rules can change, so keep your CPA and attorney in the loop.
Can I move into the replacement property later?
You can, but not right away. The property needs to be held for investment first, and the Section 121 home sale exclusion has extra ownership requirements after an exchange. Talk to your CPA before you plan on it.
Are you an attorney, a CPA or the intermediary?
No. I am a real estate agent. I explain how an exchange fits into a sale and a purchase, price and market the property, and coordinate the professionals who give legal and tax advice.
Thinking about selling a rental? Start with the plan.
No pressure and no obligation. I will help you price the property, map the 45 and 180 day timeline, and line up your CPA and intermediary before we list. If you already know you want out of landlording, we can talk through that too.
Brandon Menchaca · Luxury Property Specialist · Coldwell Banker Global Luxury · 12 years in South OC
General information only, not legal, tax or financial advice. Brandon Menchaca is a real estate agent, not an attorney, CPA (certified public accountant) or qualified intermediary, and no professional relationship is created by this page. Figures and rules reflect federal and California law as of October 2026, including the Section 1031 limit to real property that took effect in 2018. Congress has considered changes to Section 1031 before, so confirm current law with a tax professional before you act. Examples are illustrative, use assumed values and top tax rates, and are not a prediction of your results. Every exchange has deadlines that cannot be extended, so work with a qualified intermediary from the start.
CalDRE (California Department of Real Estate) #01947478. Coldwell Banker Global Luxury. Each office is independently owned and operated. Equal Housing Opportunity.
