A 1031 exchange lets you defer tax on the gain when you exchange real estate held for business or investment for other like-kind real estate. Identify the replacement within 45 days, receive it within 180 days, and report it on Form 8824. California follows these rules and adds Form FTB 3840 when the replacement is outside the state.
Rules on this page come from the IRS's like-kind exchange guidance, the 2025 Instructions for Form 8824 and the Franchise Tax Board's 2025 Instructions for Form FTB 3840, checked on October 3, 2026. This is general information, not tax advice; work with a tax professional and a qualified intermediary.
What are the rules for a 1031 exchange in California?
- Both properties must be real property held for productive use in a business or for investment. Since January 1, 2018, only real property qualifies.
- Real property is generally like-kind to other real property, improved or unimproved. Real property in the United States is not like-kind to real property outside the United States.
- A home used solely as your personal residence does not qualify, and neither does real property held primarily for sale.
- If you also receive cash or other property that is not like-kind, gain is taxable to that extent.
- Report the exchange on IRS Form 8824 with your return for the year you transferred the property you gave up.
The 45-day and 180-day deadlines
| Step | Deadline |
|---|---|
| Identify the replacement property | Within 45 days after you transfer the property you give up |
| Receive the replacement property | By the earlier of 180 days after that transfer or the due date, with extensions, of your tax return for that year |
A qualified intermediary (QI) can hold the sale proceeds between the two closings. Related parties and your agents are disqualified persons and cannot act as your QI.
California's extra rule: Form FTB 3840
Anyone who exchanges California real property for like-kind property located outside California must file Form FTB 3840 with the Franchise Tax Board, whatever their state of residence. The filing is annual: it continues each year until the deferred California-source gain is recognized, even for taxpayers not otherwise required to file a California return.
What is the 2 year rule for a 1031 exchange?
It applies to exchanges with related parties: your spouse, child, grandchild, parent, grandparent, brother or sister, or a related corporation, partnership, trust or estate. If you or the related party dispose of the property received before 2 years after the last transfer in the exchange, the deferred gain generally must be reported for the year of that disposition. You also file Form 8824 for the 2 years after a related-party exchange.
What is not allowed in a 1031 exchange?
- Property used solely as your personal residence.
- Real property held primarily for sale.
- Personal or intangible property, such as equipment, vehicles or artwork, since January 1, 2018.
- Exchanging U.S. real property for real property outside the United States.
- An exchange structured to avoid the related-party rules.
What is the downside of a 1031 exchange?
The gain is deferred, not erased, and California keeps tracking its share through Form FTB 3840 when the replacement is out of state. The deadlines are strict, and any cash or non-like-kind property you receive is taxable to that extent.
How do you avoid capital gains tax on a home you live in?
A 1031 exchange does not apply to a home used solely as your residence. Instead, section 121 may let you exclude part or all of the gain if you owned and used the home as your main home for at least 2 years during the 5 years before the sale. A property used partly as a home and partly for business or rental is split between the two rules.
Related guides
Sources
Checked October 3, 2026
Last verified: October 3, 2026. General information only, not tax advice.
Frequently Asked Questions
What are the rules for 1031 exchanges in California?+
Exchange real property held for business or investment for like-kind real property, identify the replacement within 45 days, receive it within 180 days or by your return's due date if earlier, and report it on Form 8824. If the replacement is outside California, also file Form FTB 3840 every year until the gain is recognized.
What is the 2 year rule for 1031?+
It applies to exchanges with related parties such as a spouse, child, parent, sibling or related business. If either party disposes of the property received within 2 years after the last transfer, the deferred gain generally becomes reportable that year.
What is not allowed in a 1031 exchange in California?+
A home used solely as your residence, real property held primarily for sale, personal or intangible property, U.S. property exchanged for foreign property, and exchanges structured to avoid the related-party rules.
What is the downside of a 1031 exchange?+
The tax is deferred, not eliminated; the 45- and 180-day deadlines are strict; any cash or non-like-kind property received is taxable to that extent; and California tracks out-of-state replacements with Form FTB 3840.
Can I do a 1031 exchange on my primary residence?+
No, not for a home used solely as your personal residence. Section 121 may let you exclude gain instead if you owned and lived in it for at least 2 of the 5 years before the sale.
Do I have to file anything with California for a 1031 exchange?+
Yes, if you exchange California real property for property outside California: Form FTB 3840, filed every year until the deferred California-source gain is recognized.
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