Investment Property

The 1031 Exchange

The 1031 Exchange Treasury Funds Home Loans, Inc.

A 1031 exchange, also known as a like-kind exchange or a tax-deferred exchange, is a provision in the U.S. Internal Revenue Code (Section 1031) that allows real estate investors to defer capital gains taxes when they sell a property and reinvest the proceeds into another like-kind property. This provision applies to both federal taxes and, in most cases, state taxes, including California.

Here’s how a 1031 exchange typically works in California:

Qualified Properties

To qualify for a 1031 exchange, both the property being sold (the relinquished property) and the property being acquired (the replacement property) must be held for productive use in a trade or business or for investment purposes. In California, this means that both properties must be located within the state.


The process of a 1031 exchange involves strict timing requirements. After selling the relinquished property, the investor has 45 days to identify potential replacement properties and 180 days to complete the purchase of one or more replacement properties. These timelines are crucial and must be adhered to in order to qualify for the tax-deferred treatment.

Qualified Intermediary

To facilitate the exchange and ensure compliance with IRS regulations, investors typically work with a qualified intermediary (QI) or accommodator. The QI holds the proceeds from the sale of the relinquished property in escrow and then uses those funds to purchase the replacement property.

Equal or Greater Value

The value of the replacement property or properties must be equal to or greater than the value of the relinquished property in order to defer all capital gains taxes. Any cash or other non-like-kind property received as part of the exchange may be subject to taxation.

Tax Deferral

By completing a 1031 exchange, investors can defer paying capital gains taxes that would otherwise be due upon the sale of the relinquished property. This allows investors to preserve more of their investment capital to reinvest in potentially higher-yielding properties.

Potential for Repeat Exchanges

There is no limit to the number of times an investor can utilize a 1031 exchange, allowing for the potential accumulation of wealth through successive exchanges.

It’s important for investors considering a 1031 exchange in California to work closely with a qualified intermediary and consult with tax professionals or legal advisors familiar with the intricacies of real estate transactions and tax laws in both California and at the federal level. This ensures compliance with all applicable regulations and maximizes the benefits of the exchange.