California conforms to federal 1031 rules, but has a clawback that can follow you across state lines.
Yes. California conforms to federal IRC §1031 rules. You can complete a 1031 exchange involving California property using the same federal rules: 45-day identification window, 180-day closing window, Qualified Intermediary requirement, and like-kind property standards.
Here's where California gets complicated: California has a clawback provision (California Revenue and Taxation Code §18031) that requires you to report deferred gain if you exchange out of California and later sell the replacement property in a different state.
Example: You sell a rental property in Los Angeles via a 1031 exchange and buy a replacement property in Texas. California defers your state capital gains tax. Later, you sell the Texas property in a standard taxable sale. California wants its cut, even though the sale happened in Texas.
To comply, you must file California FTB Form 3840 annually until the deferred gain is recognized. This form tracks the exchange and puts California on notice that a future taxable event will trigger state tax.
If you fail to file Form 3840, you risk penalties, and California can audit you years later when you eventually sell.
When a property in California is sold, the buyer is generally required to withhold 3.33% of the gross sales price at closing. However, if you're completing a valid 1031 exchange, you can apply for a withholding exemption using current FTB Form 593.
File Form 593 before or at closing. If withholding occurs and your exchange qualifies, you can get a refund when you file your California tax return.
If you're buying California property as a replacement in a 1031 exchange, California will tax the eventual gain when you sell, whether you're a resident or not. Plan accordingly.
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