# 1031 Exchange in California: Rules, the Clawback, and Form 3840

> California 1031 exchange rules: how the state taxes deferred gains, the out-of-state clawback, annual Form 3840 filing, and the real-estate withholding exemption.

By [Adam Kalimi](https://whosetitle.com/author/adam-kalimi) · Published 2026-07-28 · Updated 2026-07-28

Canonical: https://whosetitle.com/blog/1031-exchange-california

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California recognizes the 1031 exchange — sell an investment property, roll the proceeds into a replacement, and defer both federal *and* California tax on the gain. But California is also the state with the most teeth in its follow-up. It taxes capital gains as ordinary income at rates up to 13.3%, and it does not forget a deferred gain just because you exchanged your way out of the state.

Here's what's federal, what's California-specific, and the one form that catches people years after the exchange.

## The federal rules don't change

Everything in [the 1031 playbook](/blog/1031-exchange-guide) applies exactly the same in California:

- **45 days** to identify replacement property in writing, **180 days** to close — both counted from your sale date. Map your dates with the [deadline calculator](/free-tools/1031-exchange-deadline-calculator).
- Proceeds must go to a [qualified intermediary](/glossary/qualified-intermediary), never to you.
- Buy equal or greater in value and debt, or the shortfall is taxable [boot](/glossary/boot-1031-exchange).

## What California adds

```viz-stats
{
  "items": [
    { "value": "13.3%", "label": "Top CA rate on capital gains — taxed as ordinary income, no preferential rate" },
    { "value": "Form 3840", "label": "Annual filing required after exchanging CA property for out-of-state property" },
    { "value": "3⅓%", "label": "Default withholding on CA sales — exempt when you certify a 1031 on Form 593" }
  ],
  "note": "A conforming exchange defers all of it. The clawback below is what happens when the chain ends."
}
```

**California conforms to Section 1031 for real estate.** A properly executed exchange defers California tax right alongside the federal tax. For real property held for investment or business use, the state follows the federal framework — same deadlines, same intermediary requirement, same boot rules.

**The clawback: California never releases its claim.** Exchange a Sacramento rental into a Nashville rental and the deferral works — but the gain that accrued while the property was in California stays *California-source income* forever. When you eventually sell the out-of-state property in a taxable sale, California taxes its share of the deferred gain, even though the property you sold is in Tennessee and even if you moved to Tennessee too. Exchanging out of state defers California tax; it does not escape it.

**Form 3840, every single year.** Since 2014, anyone who exchanges California property for out-of-state property must file FTB Form 3840 with their California return **every year** the deferral is outstanding — not just the year of the exchange. Skip it and the Franchise Tax Board can assess the deferred tax immediately. If you've done a CA-to-elsewhere exchange and never heard of this form, that's a conversation to have with your CPA this week.

**Withholding at closing.** California normally withholds 3⅓% of the sales price on real-estate sales (Form 593). A 1031 exchange qualifies for an exemption — you certify the exchange on the form at closing. If boot comes back to you, withholding applies to that portion.

## Exchanging *into* California

Investors exchanging in from other states inherit no California baggage — the state only taxes gain from the point it becomes California-source. What you do inherit is California underwriting: Proposition 13 resets the assessed value to your purchase price at closing, so model property tax at roughly 1.1–1.3% of what you're paying, not what the seller was paying.

## Finding the replacement property is the real deadline

The 45-day identification window is where California exchanges actually fail — coastal inventory is thin and competition is fast. That's the search problem WhoseTitle exists for: circle a neighborhood and pull every owner from county records, with tenure and equity signals that surface likely sellers before they list. Long-tenure landlords are especially relevant here — Prop 13 means their tax basis is low and their [depreciation](/glossary/depreciation-recapture) is deep, which makes them classic exchange counterparties.

Run your numbers first: the [1031 capital gains calculator](/free-tools/1031-exchange-capital-gains-calculator) shows the federal-plus-state bill you're deferring, and the [deadline calculator](/free-tools/1031-exchange-deadline-calculator) prints your exact dates.

*General information, not tax or legal advice. California conformity has entity-level and personal-property wrinkles beyond this article — confirm your situation with a CPA and a qualified intermediary.*