A 1031 exchange lets you sell a Sacramento rental and defer federal and California capital gains tax by buying like-kind investment real estate through a qualified intermediary. You must identify replacement property in writing within 45 days of closing the sale and close on it within 180 days, and you must never touch the sale proceeds yourself.
By Gary Burmaster, California real estate salesperson and CEO of All Inclusive Realty Group, Inc. Updated October 25, 2026. General information only, not tax or legal advice.
Most Sacramento owners who ask about a 1031 exchange are in one of three spots: a rental that has gone up a lot in value and no longer earns what it should, a tired landlord who wants fewer or easier doors, or an investor trading a single-family house for a small multifamily building. The tax rules are federal, but California adds its own filing requirement and its own property tax consequences. This guide covers the whole picture in the order you will meet it.
What is a 1031 exchange?
Internal Revenue Code Section 1031 allows a taxpayer to defer gain when real property held for investment or for use in a trade or business is exchanged for other like-kind real property. Since 2018, Section 1031 applies only to real property, not to equipment or other personal property. "Like-kind" is broad for real estate: a Sacramento single-family rental can be exchanged for a fourplex, a commercial building or vacant land held for investment. Your own home does not qualify, and neither does property held mainly for resale, such as a quick flip.
The tax is deferred, not forgiven. Your old basis carries into the new property, and the deferred gain is recognized when you eventually sell without exchanging.
What are the 1031 exchange deadlines?
| Day | What must happen | Rule |
|---|---|---|
| Day 0 | Your sale closes and proceeds go directly to a qualified intermediary, not to you. | Treasury Regulation 1.1031(k)-1 on constructive receipt |
| Day 45 | Replacement properties are identified in a signed writing delivered to the intermediary. | IRC 1031(a)(3)(A) |
| Day 180 | You close on the replacement property, or by your tax return due date (with extensions) if that comes first. | IRC 1031(a)(3)(B) |
Both clocks start on the same day and run at the same time. Weekends and holidays do not extend them. Missing either one usually means the whole exchange fails and the gain is taxable in the year of sale.
How many replacement properties can I identify?
The regulations give three ways to identify:
- Three-property rule. Identify up to three properties of any value.
- 200% rule. Identify any number of properties as long as their combined value is no more than twice the value of what you sold.
- 95% rule. Identify more than that, but then you must actually acquire at least 95% of the value you identified.
Most Sacramento owners use the three-property rule and name a first choice plus two backups.
How do I fully defer the tax?
To defer all of the gain, buy replacement property of equal or greater value, reinvest all of the net cash, and replace any debt you paid off with new debt or added cash. Anything you receive that is not like-kind property, such as cash left over or a reduction in debt, is called boot and is taxable to that extent. Depreciation recapture is deferred along with the gain when the exchange is fully reinvested.
What does California require on a 1031 exchange?
California follows the federal 1031 rules, with three state-specific items Sacramento owners need to know:
- FTB Form 3840. If you exchange California property for replacement property outside California, Revenue and Taxation Code 18032 requires you to file California Form 3840 for the year of the exchange and every year after, until the deferred gain is recognized. California keeps the right to tax that California-source gain when you later sell.
- Withholding. California generally requires withholding on sales of California real property (Revenue and Taxation Code 18662). An exchange can qualify for an exemption, which is certified on FTB Form 593 through escrow.
- Property tax. A 1031 exchange defers income tax only. Under Proposition 13, your California replacement property is reassessed at its purchase price, so your property tax bill resets on the new property.
Federally, the exchange is reported on IRS Form 8824 with your return for the year the sale closed.
How do I sell a Sacramento rental with a 1031 exchange, step by step?
- Talk to your tax advisor first. Confirm the gain, depreciation history and whether an exchange makes sense versus selling outright.
- Pick a qualified intermediary before you open escrow on the sale. The intermediary must be in place before closing; you cannot add one after the money reaches you.
- Price the rental on its real operating numbers. A buyer pays for rents, expenses and condition, so have twelve months of income and repairs ready.
- Handle the tenants correctly. A sale does not end a lease. Under Civil Code 1946.2, a tenancy covered by just cause can only be ended for a legal reason, so most Sacramento rentals sell with tenants in place.
- Start shopping for replacements before you close. 45 days goes fast in a tight market. Line up two or three candidates early.
- Identify in writing by Day 45 and close by Day 180. Keep copies of everything the intermediary receives.
- File correctly. IRS Form 8824, and FTB Form 3840 if any replacement property is outside California.
What are common 1031 mistakes Sacramento owners make?
- Letting sale proceeds land in their own account, even for a day.
- Waiting until after closing to look for replacement property.
- Buying a cheaper replacement and being surprised by boot.
- Exchanging into a home they plan to live in right away.
- Forgetting that the California property tax resets on the new purchase.
- Selling to, or buying from, a related party without understanding the extra holding rules in IRC 1031(f).
Can I do a reverse exchange?
Yes. In a reverse exchange you buy the replacement first, and an exchange accommodation titleholder holds one of the properties while you sell the other, following the safe harbor in IRS Revenue Procedure 2000-37. The same 45-day and 180-day periods apply. Reverse exchanges cost more and need more cash up front, so plan them with your intermediary early.
How does AIRG help with a 1031 exchange?
AIRG's Real Estate Investment Sales team coordinates the sale and the replacement purchase around your deadlines. We manage Sacramento rentals every day, so we price property on real rent rolls, not projections, and our management team can take over a replacement rental the day it closes. Your qualified intermediary and tax advisor handle the exchange itself. Our free exchange deadline tool takes your sale closing date and shows your Day 45 and Day 180 dates.
Plan your 1031 exchange and get your deadline dates
Frequently asked questions
How long do I have to complete a 1031 exchange?
You have 45 days from the sale closing to identify replacement property in writing and 180 days from the sale closing, or your tax return due date with extensions if earlier, to close on it. The two periods run at the same time.
Does California recognize 1031 exchanges?
Yes. California follows the federal rules. If the replacement property is outside California, you must file FTB Form 3840 each year until the deferred California gain is recognized.
Can I 1031 exchange a Sacramento rental for a property in another state?
Yes, real property anywhere in the United States is like-kind to other U.S. real property. California will track the deferred gain through Form 3840 and can tax it when you eventually sell.
Does a 1031 exchange avoid property tax reassessment in California?
No. A 1031 exchange defers income tax only. Your California replacement property is reassessed at its purchase price under Proposition 13.
Can I use a 1031 exchange on my primary residence?
No. Section 1031 covers property held for investment or business use. A primary residence may qualify for the separate home sale exclusion under IRC Section 121 instead.
What happens if I miss the 45-day deadline?
The exchange generally fails and the sale is treated as a taxable sale. The deadlines are not extended for weekends or holidays, except in limited federally declared disaster situations.
This article is for informational and educational purposes only and is not tax or legal advice. Consult a qualified intermediary and a California tax professional before starting an exchange.
