Selling in Los Angeles, Buying Somewhere Else: A 1031 Exchange Briefing

A 1031 exchange can defer federal and California tax on the gain when you sell a Los Angeles investment property and buy elsewhere. It does not end California's interest in that gain, and it does not change the transfer tax on the sale. Here is what happens at closing, in the year after, and every year you hold the replacement.

See what to prepare before closing

The short answer

If you sell investment real property in Los Angeles and buy like-kind real property in another state through a properly structured 1031 exchange, you can defer the gain for federal purposes and for California. Three things still apply:

1. At closing, California's real estate withholding rules apply unless you certify the exchange exemption on Form 593.
2. Every year after, you file FTB Form 3840 with California for as long as the California-source deferred gain has not been recognized, even if you have moved away.
3. On the deed, the City of Los Angeles transfer tax, including the Measure ULA tax on higher-value sales, is imposed on the conveyance. Neither the City's ULA exemptions nor the county's list of exempt transfers includes an exemption for 1031 exchanges.

The federal clocks are the same as anywhere: 45 days to identify replacement property in writing, and the replacement must be received by the earlier of day 180 or the due date, including extensions, of your tax return for the year of the sale.

Where are you in the process?

• Selling first (the usual deferred exchange). Engage the qualified intermediary and sign the exchange agreement before closing. Certify the Form 593 exemption. Confirm the settlement statement sends the proceeds to the intermediary. Then work on the 45-day list. See the checklist below.
• Buying first. If you want to buy out of state before your LA sale closes, that is a reverse exchange. It needs an exchange accommodation titleholder set up before you buy, and it has its own rules and limits. See reverse 1031 exchanges.
• Already closed, and the money reached you or your account. A qualified intermediary can't be added after the fact to undo receipt of the proceeds. Talk to your CPA about the tax year. See can you do a 1031 exchange after closing?

Federal rules (the same in every state)

• What qualifies. Real property held for use in a business or for investment, exchanged for real property held the same way. Since 2018 only real property qualifies, and property held primarily for sale does not (26 U.S.C. §1031).
• Don't touch the money. If you actually or constructively receive the sale proceeds before you receive the replacement property, the transaction can be treated as a sale. A qualified intermediary holds the proceeds under a written agreement that limits your right to receive, pledge or borrow them (Treas. Reg. §1.1031(k)-1).
• Who can't be your intermediary. Anyone who acted as your attorney, accountant, employee, investment banker or broker, or real estate agent or broker in the two years before the sale (other than for 1031 exchange services), and related persons.
• Identification. Written, signed, unambiguous, and delivered by day 45 to a person involved in the exchange who is not disqualified. Up to three properties of any value, or any number within 200% of the value you sold.
• The 180 days can be shorter. For a sale that closes late in the year, the return due date can arrive first. Filing an extension protects the full period. Use the deadline calculator and read how the return due date limits the exchange period.
• Deferred, not forgiven. Your basis carries over to the replacement property. Cash left over and debt that isn't replaced can be taxable boot.
• Reporting. Form 8824 goes with your federal return for the year you sold. See Form 8824 explained.

California: what follows you out of state

Withholding at closing (Form 593). On a California sale, the escrow holder, title company, attorney or intermediary that closes the deal generally withholds 3 1/3% of the sales price unless an exemption applies. A deferred 1031 exchange is exempt from withholding at the time of the initial transfer. If you receive more than $1,500 in cash or other property from the sale, the intermediary must withhold. If the exchange does not happen or does not qualify, the intermediary must withhold 3 1/3% of the sales price. Certify the exemption on Form 593 before escrow closes.

Withholding is a prepayment, not the tax. Being exempt from withholding does not relieve you of filing a California return.

Annual reporting (FTB 3840). If you exchange California property for property outside California, you file FTB 3840 for the year of the exchange and every year after, generally until the California-source deferred gain is recognized on a California return. The obligation continues even if you later exchange the out-of-state property again. If you don't file the form or a return, the FTB may issue a Notice of Proposed Assessment for the deferred gain plus penalties and interest. The detailed walkthrough is in how California's 1031 clawback rule works.

How California taxes the gain when it is recognized. The FTB states: "California does not have a lower rate for capital gains. All capital gains are taxed as ordinary income" (FTB). Ask your CPA what that means for you.

If you buy the replacement in California instead. A purchase in California is a change in ownership, which the county assessor reassesses under Proposition 13 (BOE Publication 29). FTB 3840 applies only when California property is exchanged for property outside California.

Los Angeles: the transfer tax on the sale

The City of Los Angeles charges a real property transfer tax on documents that convey property in the city. As published by the LA Office of Finance on September 30, 2026:

Three details the City spells out:

• The Base Tax is computed on net value (excluding liens that remain), while the ULA Tax is computed on gross value, including liens.
• The ULA thresholds are adjusted each year, so a sale that closed before July 1, 2026 used different thresholds.
• The listed exemptions depend on who the buyer is, such as qualifying affordable-housing organizations and government agencies. None is for 1031 exchanges.

A county documentary transfer tax also applies under Revenue and Taxation Code §11911; your escrow officer will show how the county and city amounts combine.

Before you close: checklist

Questions to ask any intermediary about a California sale. California's exchange facilitator law (Financial Code §51000 and following) sets these protections, so ask for them in writing:

• Which option do you use under §51003: a fidelity bond of at least $1,000,000, a $1,000,000 deposit or letter of credit, or a qualified escrow or trust account that needs both your and my written authorization to withdraw? Please send the certificate or account terms.
• Do you carry errors-and-omissions insurance of at least $250,000 (or the equivalent deposit)? Please send the certificate.
• Are my funds held separately from your operating accounts, and how are they invested?
• Will you notify me if control of your company changes while you hold my funds?

The full worksheet is on how to choose a qualified intermediary.

Watch

General rule explainer — not recorded for Los Angeles

It's Not Six Months. It's 180 Days. · 23 seconds

The exchange period ends on the earlier of day 180 or your tax-return due date, including extensions. For a sale that closes in the last months of the year, file an extension.

A worked sequence

Hypothetical — not a client and not a result. An owner holds a fourplex in Los Angeles as a rental and plans to buy two single-family rentals in another state. The sale is set to close on Monday, November 16, 2026.

• Before closing, the owner signs an exchange agreement with a qualified intermediary, and escrow circulates the assignment of the sale contract and written notice to all parties. The owner certifies the deferred-exchange exemption on Form 593. Escrow checks the sale price against the LA thresholds, using gross value for the ULA test, and confirms who pays the transfer tax under the purchase contract.
• Day 45 falls on Thursday, December 31, 2026. By then the owner delivers a signed list identifying three candidate properties to the intermediary.
• Day 180 would be Saturday, May 15, 2027, but the federal return for 2026 is due April 15, 2027. The earlier date controls unless the owner files an extension, which the owner's CPA does in March.
• Both purchases close in April. The CPA files Form 8824 federally, and the California return includes FTB 3840 for 2026. A reminder is set to file FTB 3840 every year until the California-source gain is recognized.

Dates are illustrative. Check your own with the deadline calculator.

Frequently asked questions

If I buy my replacement property in another state, do I still owe California anything?

Not at closing, if the exchange qualifies. California still tracks the deferred gain. You file FTB 3840 every year until the California-source gain is recognized, and California taxes that gain as ordinary income when it is.

Will escrow withhold 3 1/3% of my sale price?

Not if you certify the deferred-exchange exemption on Form 593 before closing. The intermediary must withhold if you take more than $1,500 in cash or other property from the sale, or if the exchange fails.

Does a 1031 exchange avoid the LA transfer tax or Measure ULA?

No exemption for exchanges appears in the City's ULA information or in the county's list of exempt transfers. The tax is on the conveyance, and ULA is measured on gross value.

Is it 180 days or six months?

Neither is quite right. You have until the earlier of 180 days after the sale or your tax-return due date, including extensions.

Can my CPA or my real estate agent act as my qualified intermediary?

Not if they acted as your accountant or agent in the two years before the sale, other than for 1031 exchange services. They can still advise you.

Who you'll work with

Leah Badach is a Certified Exchange Specialist with 11+ years of 1031 exchange experience. Before you sign, Leah confirms in writing which qualified intermediary will hold your funds and gives you its account, bond and insurance documents. Ask for those documents from any intermediary you consider. You can verify the credential in the FEA CES directory.

Related: 1031 exchanges in California · California's clawback rule · Buying replacement property out of state · Which states recognize 1031 exchanges · 1031 exchange timeline · Reverse 1031 exchanges

Sources

• 26 U.S.C. §1031: real property only; 45-day identification; the earlier of 180 days or the return due date.
• Treas. Reg. §1.1031(k)-1: identification rules, constructive receipt, qualified intermediaries, disqualified persons.
• FTB Form 3840 instructions (2025) and FTB: reporting like-kind exchanges.
• FTB Form 593 instructions (2025): real estate withholding and the exchange exemption.
• FTB: capital gains and losses.
• LA Office of Finance: Measure ULA, read September 30, 2026.
• LA County Recorder: documentary transfer tax statutes.
• BOE Publication 29: California property tax.
• California Financial Code §§51000–51013: exchange facilitators.

Educational information, not tax or legal advice.