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- California exchanges begin with federal section 1031
- The 45-day and 180-day deadlines run together
- A qualified intermediary protects the exchange structure
- Cash, debt relief, and other property can create taxable boot
- California tracks gain that leaves the state
- California and federal reporting are separate
- Use one timeline and two jurisdiction checklists
- Sources
Key Facts
- Federal level: Section 1031 defers gain or loss only for qualifying real property held for business or investment and exchanged for like-kind real property with the same intended use.
- Federal level: Replacement property generally must be identified within 45 days and received within 180 days or by the return due date with extensions, if earlier.
- California: California generally follows the federal real-property framework but tracks deferred California-source gain when California property is exchanged for out-of-state property.
- California: Individual taxpayers use Form FTB 3840 for a qualifying California-to-out-of-state exchange and generally continue annual filings while deferred gain remains.
- Federal level: Cash or other non-like-kind property can trigger current gain, and receiving sale proceeds directly can defeat deferred-exchange treatment.
- Mixed jurisdiction: Form 8824 handles federal reporting, while California forms and sourcing rules require a separate state review.
California exchanges begin with federal section 1031
Section 1031 generally provides nonrecognition when real property held for productive use in a trade or business or for investment is exchanged solely for like-kind real property to be held for one of those purposes. Property held primarily for sale and a personal residence ordinarily do not qualify under that business-or-investment rule.
For real estate, like kind refers broadly to the nature or character of the property rather than its grade or quality. United States real property is not like kind to real property outside the United States.
The 45-day and 180-day deadlines run together
A deferred exchange generally requires written identification of replacement property by midnight of day 45 after transfer of the relinquished property. Receipt must occur by day 180 or the federal return due date, including extensions, if earlier.
The 45-day period is part of the 180-day period rather than an additional period. Weekends and holidays generally do not extend either statutory deadline.
A qualified intermediary protects the exchange structure
Deferred-exchange regulations provide a safe harbor when a qualified intermediary enters a written exchange agreement, transfers the relinquished property, acquires the replacement property, and limits the taxpayer’s access to proceeds. Simply selling property, taking the cash, and later buying another property is ordinarily a taxable sale followed by a purchase.
The intermediary cannot cure an ineligible property or a missed deadline. Identification notices, assignment documents, settlement statements, and fund restrictions should be coordinated before the relinquished-property closing.
Cash, debt relief, and other property can create taxable boot
When an exchange includes money or non-like-kind property, realized gain can be recognized up to the value of that additional consideration. Net debt relief may also affect the boot calculation, subject to liabilities assumed and other exchange adjustments.
Deferral does not erase gain. The replacement property generally receives a carryover-based basis adjusted for money, recognized gain, and other statutory items, preserving deferred gain for a later taxable disposition.
California tracks gain that leaves the state
California Revenue and Taxation Code section 18032 requires information reporting when gain or loss is deferred on an exchange of California property for replacement property outside California. For individuals and many pass-through owners, Form FTB 3840 is the mechanism used to track that deferred California-source amount.
The filing generally begins with the California return for the exchange year and continues annually until the deferred California gain or loss is recognized, subject to the form’s current instructions. Moving away or acquiring replacement property elsewhere does not by itself eliminate California’s claimed source connection.
California and federal reporting are separate
Federal Form 8824 reports the exchange, related-party details, realized gain, recognized gain, and replacement-property basis. California reporting may require Form FTB 3840 plus the appropriate California return and basis adjustments.
An exchange between two California properties does not create the same out-of-state tracking issue, although ordinary California return reporting still applies. Entity type, residency, installment arrangements, and later transfers can change the required state forms.
Use one timeline and two jurisdiction checklists
Before closing, confirm eligible use, title-holding taxpayer, intermediary documents, identification strategy, financing, and the federal return deadline. After closing, preserve written identifications, closing statements, intermediary records, improvement costs, debt schedules, Forms 8824 and FTB 3840, and proof of e-filing.
The related overview of federal 1031 like-kind exchange rules supplies broader federal context. California-source tracking should remain a distinct workstream for as long as the state form requires reporting.
