Under IRC § 1031, no gain or loss is recognized when you exchange real property held for business or investment, such as a rental, solely for like-kind real property held for the same purposes. You must identify the replacement within 45 days and receive it within 180 days (or by your return's due date, if earlier), without taking control of the sale proceeds, and report the exchange on Form 8824. If you swap California property for property in another state, California requires form FTB 3840 every year until the deferred California gain is recognized.

The short version

  • Since January 1, 2018, § 1031 applies only to real property. California also limits exchanges to real property for taxable years beginning on or after January 1, 2025.
  • A primary residence and property held primarily for sale do not qualify.
  • Identify replacement property within 45 days; receive it by the earlier of 180 days or the due date (with extensions) of your return for that year.
  • Cash or other non-like-kind property you receive ("boot") is taxable up to the gain.
  • Report the exchange on Form 8824 for the year of the transfer.
  • California tracks deferred gain on California property exchanged for out-of-state property through FTB 3840.

What qualifies

Section 1031(a)(1) covers real property "held for productive use in a trade or business or for investment," exchanged solely for like-kind real property held for those purposes. The IRS says property held primarily for sale does not qualify, and "Property used primarily for personal use, like a primary residence" does not either.

Rentals with some personal use

Rev. Proc. 2008-16 gives a safe harbor for a dwelling unit (a house, apartment, condominium or similar unit with sleeping space, bathroom and cooking facilities). The IRS "will not challenge" whether it is held for investment if:

  1. you owned the relinquished unit for at least 24 months immediately before the exchange;
  2. in each of the two 12-month periods before the exchange, you rented it at a fair rental for 14 days or more; and
  3. in each of those periods, your personal use did not exceed the greater of 14 days or 10% of the days it was rented at a fair rental.

The same tests apply to the replacement property for the 24 months after the exchange. If the replacement later fails, the IRS says you "should file an amended return and not report the transaction as an exchange under § 1031." Falling outside the safe harbor does not by itself disqualify an exchange, but it removes the protection. All other § 1031 requirements still apply.

The deadlines and the intermediary

  1. Sell the relinquished property. The clock starts on the day you transfer it.
  2. Identify the replacement within 45 days after the transfer (§ 1031(a)(3)).
  3. Receive the replacement by the earlier of 180 days after the transfer or the due date, with extensions, of your return for the year of the transfer.
  4. Keep your hands off the money. Taking control of cash or other proceeds before the exchange is complete may disqualify it. You, or your agent such as your attorney or accountant, can't serve as the intermediary.
  5. Report it on Form 8824 for the year of the transfer.

Boot and liabilities

Under § 1031(b), if you receive "other property or money" in the exchange, gain is recognized, but "in an amount not in excess of the sum of such money and the fair market value of such other property." No loss is recognized in that case (§ 1031(c)).

Debt counts too. Pub 544: "if the other party to a nontaxable exchange assumes any of your liabilities, you will be treated as if you received money in the amount of the liability." That amount can be reduced by liabilities you assume and cash you pay. So the debt on both properties matters, not only the cash.

Form 8824 and what carries over

ItemRuleSource
Which formParts I to III of Form 8824 report each exchange of business or investment real propertyForm 8824 instructions (2025)
Taxable bootPart III figures the gain to report if cash or non-like-kind property is involvedForm 8824 instructions (2025)
Replacement basisPart III also figures the basis of the like-kind property receivedForm 8824 instructions (2025)
Related partiesFile Form 8824 for the 2 years following the year of a related party exchangeForm 8824 instructions (2025)
Suspended passive lossesGenerally freed only by a fully taxable disposition, so an exchange may not release themIRC § 469(g)
Later home useThe home sale exclusion does not apply to a sale within 5 years after you acquired the home in a § 1031 exchangeIRC § 121(d)(10)

Former homes: combining § 121 and § 1031

A former home that has been converted to a rental may be eligible for an exchange; talk to a tax professional and a qualified intermediary. When an exchanged property meets the requirements of both § 121 and § 1031, Rev. Proc. 2005-14 sets the order:

  • "Section 121 must be applied to gain realized before applying § 1031."
  • Depreciation gain can't be excluded under § 121, "However, § 1031 may apply to such gain."
  • Boot is taken into account "only to the extent the boot exceeds the gain excluded under § 121."
  • The replacement property's basis is increased by the gain excluded under § 121.

See selling a former home you rented out for the § 121 rules.

California differences

FTB 3840: the annual filing for out-of-state replacement property

Under R&TC § 18032(a), if gain on exchanging property in California is deferred under § 1031 and the property you acquire is outside California, you must file an information return "for the taxable year of the exchange and for each subsequent taxable year in which the gain or loss from that exchange has not been recognized." This applies to exchanges in taxable years beginning on or after January 1, 2014.

  • The form is FTB 3840, California Like-Kind Exchanges. It applies to all taxpayers "regardless of residence status," so moving away does not end it. For a disregarded entity, the owner files.
  • Why it matters. The FTB says the source of a gain on California property "is preserved without regard to when such gain or loss may be recognized." When the out-of-state replacement is later sold in a taxable sale, California can tax the deferred California gain, even if you no longer live here.
  • If you don't file, the FTB may issue a Notice of Proposed Assessment for the deferred gain, plus penalties and interest.
  • Due dates for 2025. Calendar-year individuals: April 15, 2026, or October 15, 2026 with an extension. Partnerships and LLCs classified as partnerships: March 16, 2026.
  • More than one exchange? File a separate FTB 3840 for each.
  • No other California return? File FTB 3840 on its own.

Withholding at escrow

The parties who must withhold California tax on a sale include "any intermediary or accommodator in a deferred exchange" (R&TC § 18662(e)). Form 593 exempts a § 1031 exchange only for "the amount of the gain not required to be recognized." If the exchange fails the 45 or 180 day rules, the intermediary must notify the FTB in writing within 10 days and remit withholding on undisbursed funds. See California withholding when you sell a rental.

What to do next

  1. Talk to a tax professional and a qualified intermediary before you list, not after you close.
  2. Line up the intermediary so sale proceeds never pass through your hands.
  3. Calendar day 45 and day 180 from the closing date, and compare day 180 with your return due date.
  4. Compare the debt and price on both properties with your tax professional to spot boot.
  5. If the replacement is outside California, plan for FTB 3840 every year until the gain is recognized.
  6. Keep the closing statements, intermediary agreement and identification letter with your tax records. A rental records system helps.

McKee Properties manages rentals from its Coronado office; contact us with questions about your property.

Frequently asked questions

Can I do a 1031 exchange on my former home?

A former home that has been converted to a rental may be eligible, because § 1031 covers property held for investment and excludes property used primarily as a personal residence. Talk to a tax professional and a qualified intermediary. If the property also qualifies under § 121, Rev. Proc. 2005-14 applies the home sale exclusion first and § 1031 to the rest of the gain.

What happens if I miss the 45-day or 180-day deadline?

The replacement does not meet the § 1031(a)(3) timing rules, so the exchange generally loses § 1031 deferral; ask your tax professional how the sale will then be reported. In California, if the intermediary is holding funds when the exchange fails, it must notify the FTB within 10 days and remit withholding on the undisbursed funds.

Is the cash I take out of an exchange taxable?

Yes, up to the amount of your gain. Under § 1031(b), money or other non-like-kind property you receive is recognized as gain, but not more than the gain realized. Liabilities the other side takes over are treated as money received, reduced by liabilities you take on and cash you pay.

Can I exchange a California rental for a rental in another state?

The FTB's rules expressly cover exchanges of California real property for like-kind property located outside California. California requires FTB 3840 for the year of the exchange and each later year until the deferred California gain is recognized, even if you move away, and it can tax that gain when the replacement is sold.

Does a 1031 exchange free my suspended passive losses?

Probably not. Suspended passive losses generally are released only by a fully taxable disposition of your entire interest to an unrelated party, and an exchange that defers gain is not fully taxable. Ask your tax professional how your carryovers will be treated.

This is general information, not tax or legal advice. Tax rules change and depend on your facts; talk to a CPA or enrolled agent before acting.

Sources

Verified October 19, 2026.

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