1031 Exchanges in California: Rules, Taxes, Insurance, and the Long Arc

A Shop 1031 research page. Reviewed 2026-06-03. Every claim sourced; sources collected at the foot of the page.

California is the largest single market for §1031 exchanges in the United States, and the most consequential to underwrite carefully. The federal mechanics are the same as anywhere else; the state-level overlay is what distinguishes a California exchange from one executed elsewhere. The Franchise Tax Board reserves a claim on every California-sourced gain that leaves the state through a §1031, the property-tax regime resets on transfer in ways that materially change the buyer’s hold-period math, and the insurance market has structurally repriced since 2023. Each of these is independently sourceable; together they form the actual calculus an exchanger should run before identifying replacement.

This page is the working guide. The federal rules, the California-specific rules, the property-tax structure under Proposition 13, the property-insurance picture after the State Farm and Allstate non-renewals, the demographic picture from the most recent Department of Finance estimates, and the legal considerations that sit outside the headline tax code. It is a research document, not a transactional one.

§1. 1031 mechanics in California

The federal floor applies in California the same way it applies everywhere. Internal Revenue Code §1031 permits the deferral of gain on the sale of real property held for productive use in a trade, business, or investment, provided the proceeds are reinvested into like-kind real property of equal or greater value through a Qualified Intermediary. Identification of replacement property must occur within forty-five days of the relinquished closing; the replacement must close within one hundred eighty days of the same event. The authorities are 26 U.S.C. §1031 and the implementing regulations at 26 C.F.R. §1.1031(k)-1, with operating guidance in IRS Publication 544. ^{1 2 3}

California conforms to the federal treatment of like-kind exchanges at the state level. The conforming provision is California Revenue and Taxation Code §18031.5, added by Assembly Bill 91 in 2019, which extends conformity to the post-Tax Cuts and Jobs Act version of §1031 with one notable carve-out preserving the pre-TCJA personal-property treatment for taxpayers below specified adjusted gross income thresholds. The practical reading is that a properly executed §1031 exchange of California real property defers California state income tax on the gain at the same time it defers the federal liability. ⁴

The California claw-back is the rule most often missed. When a California taxpayer exchanges California real property for replacement located outside California, the deferred California gain does not extinguish at the state line. It remains on the California tax rolls until the chain of like-kind exchanges ends in a recognized sale. Form FTB 3840 documents the deferred gain and must be filed for the year of the exchange and for each subsequent year the deferred gain remains unrecognized. The reporting obligation continues until the deferred gain is recognized on a California return, the property is transferred at death (basis step-up), or the replacement is donated to a qualified non-profit. Failure to file can trigger penalty and interest exposure and, in extreme cases, FTB estimation of net income on the deferred gain itself. ^{5 6}

Form 593 is the second California-specific surface. California requires withholding of 3.33 percent of the gross sale price on real property sales above $100,000, with the statutory authority running through R&T Code §18662 and the implementing instructions in the 2025 Form 593 release. The withholding is waivable for properly documented §1031 exchanges, and for deferred exchanges the QI is the responsible withholding agent. The waiver requires written certification that the seller intends to defer gain through a like-kind exchange, signed before the relinquished close and delivered to the escrow officer. Surprise withholding at close, applied because the certification arrived late, complicates the QI’s handling of proceeds and should be ruled out in advance. ⁷

California imposes no state-level registration or bonding regime on Qualified Intermediaries. The QI must satisfy federal §1031 rules: unrelated to the taxpayer, holding exchange proceeds in qualified escrow, and avoiding disqualifying actions. Because no state floor exists, the buyer should confirm independently that the QI carries fidelity bonding and errors-and-omissions coverage proportionate to the transaction size. The QI is holding the buyer’s entire exchange equity; the federal rules do not require insurance, which means the buyer’s diligence is the only protection.

California is a title-and-escrow state. Closings are typically handled by independent escrow companies and title insurers, with attorney involvement optional. Attorney engagement is nevertheless recommended for any exchange above the mid seven figures, for any cross-state structure, and for any transaction exposed to local-option transfer taxes that materially affect net proceeds.

Documentary transfer tax is established at the state floor of $1.10 per $1,000 of consideration under R&T Code §11911, with counties and certain charter cities authorized to impose additional local-option transfer taxes. The most material of these for exchangers is the Los Angeles Measure ULA, the so-called Mansion Tax, which despite the name applies to commercial property transfers in the City of Los Angeles. Effective for transactions closing after June 30, 2026, ULA imposes a 4 percent transfer tax on consideration between $5,400,000 and $10,900,000, and a 5.5 percent transfer tax on consideration of $10,900,000 or more. Thresholds adjust annually to the Chained CPI. ULA stacks on top of the standard documentary transfer tax. For an exchanger disposing of LA-City commercial property above the threshold, the ULA economics belong in the disposition pricing model, not in the closing-cost line. ^{8 9}

§2. Property tax in California

California’s effective property tax rate on owner-occupied housing is 0.70 percent, placing it thirty-second among the fifty states. The Tax Foundation aggregates effective rates from local-government data, and the California figure reflects the structural cap embedded in Article XIII A of the California Constitution. ¹⁰

The structural cap is Proposition 13. Approved by voters in 1978 and codified in Article XIII A, Prop 13 establishes three rules that govern the property-tax base in California. First, the ad valorem tax on real property is capped at 1 percent of the assessed value. Second, the assessed value of a property cannot increase by more than 2 percent annually, regardless of market-value movement. Third, the assessed value resets to the purchase price upon a change of ownership. The third rule is the one that most affects exchangers. A property that has been held for thirty years and assessed at a small fraction of current market value will be reassessed to the new purchase price on transfer, which can result in property-tax bills that are a multiple of what the seller was paying. The buyer’s hold-period economics should be modeled from the reassessed basis, not from the seller’s pro forma. ¹¹

Several local-option additions stack above the 1 percent base. Mello-Roos Community Facilities Districts impose special assessments to fund infrastructure in newer developments, and these can add hundreds or low thousands of dollars per year on a typical commercial property. School and infrastructure bond measures pass at the local level routinely, adding incremental millage. The combined effect in some submarkets, particularly newer master-planned communities in the Inland Empire and the I-15 corridor, can push effective rates well above the headline 0.70 percent state average. ¹²

There is no California analog to the homestead carve-out that protects owner-occupied housing in many other states. The property-tax structure applies symmetrically to investment property and to owner-occupied property, with the same 1 percent base and the same 2 percent annual cap on the assessed value. The reassessment trigger on transfer is identical.

Harlow’s note on unit economics. The Prop 13 reassessment trigger is structural, not circumstantial. The exchanger’s hold-period property-tax line is locked at 1 percent of the new purchase price plus the 2 percent annual escalator, with bonds and Mello-Roos additive. A ten-year hold on a $5,000,000 California acquisition prices property tax at roughly $50,000 in year one, escalating to roughly $59,800 by year ten before bond and special-district overlay. Build the line from the purchase price, not the seller’s bill.

§3. Property insurance in California

The California property-insurance market has structurally repriced since 2023, and the repricing is the single most important development a current exchanger should consider before underwriting hold-period operating expense. State Farm, the largest residential insurer in the state, stopped writing new homeowners policies in 2023 and has continued non-renewing existing policies into 2025 and 2026. Allstate stopped writing new policies in the same window. The combined effect is a residential market in which the private carriers have reduced their book, and the gap has been filled by the California FAIR Plan. ¹³

The California FAIR Plan is the state’s insurer of last resort, established under California Insurance Code §10090 et seq. and administered by participating member insurers. FAIR Plan policies in force grew from approximately 127,000 in 2019 to over 668,000 by early 2026, a roughly 425 percent increase, with the most acute growth occurring in the months following the January 2025 Los Angeles wildfires. Average FAIR Plan policy cost runs near $3,200, materially above the typical California homeowner premium. The FAIR Plan provides bare-walls coverage, not the broader perils a private homeowners policy covers, and most policyholders must layer a non-FAIR-Plan “wrap” policy to obtain market-equivalent protection. ¹⁴

The post-wildfire assessment mechanism is also material. Following the January 2025 fires, the California Department of Insurance approved a $1 billion FAIR Plan assessment levied against insurers operating in the state. State Farm’s portion was over $165 million. The Department subsequently approved a 17 percent emergency rate increase effective June 1, 2025, conditional on a temporary halt to State Farm’s block non-renewal programs through year-end. Each of these moves is consequential for the structural cost of insurance on California real property, and each is observable in the Department’s press releases and bulletins. ^{15 16}

For commercial property specifically, the picture is similar in shape but different in surface. The commercial market relies more on excess and surplus lines and on specialty wildfire and earthquake carriers, and exposure is underwritten property-by-property rather than by zip-code rating. The carriers that remain active have tightened deductibles, raised attachment points on wildfire and earthquake coverage, and in some cases declined to write coverage at all in the highest-risk inland and foothill submarkets. Exchangers identifying California replacement should obtain a binding commercial property quote before identification, not after, particularly for property within a CalFire-designated Very High Fire Hazard Severity Zone.

Earthquake coverage in California is generally separate from the standard property policy and is underwritten through the California Earthquake Authority for residential property and through private carriers for commercial. Standard property policies exclude earthquake. The CEA is a public-private entity established under California Insurance Code §10089 et seq.

Harlow’s note on unit economics. For a $5,000,000 California commercial property underwritten today, expect property-insurance expense in the range of 0.4 to 0.8 percent of insured value, or roughly $20,000 to $40,000 annually, with significant variation by submarket, construction type, and proximity to a Very High Fire Hazard Severity Zone. Earthquake coverage adds materially. Build the line from a binding quote, not from a national-average assumption.

§4. Demographic trends

California’s population stood at approximately 39,529,000 as of July 1, 2025, per the California Department of Finance E-2 series. The state added roughly 19,200 residents in the year ending July 1, 2025, a growth rate of 0.05 percent and the third consecutive year of small positive change after the 2020-2022 decline. The underlying composition is the relevant detail. Natural increase (births minus deaths) contributed roughly 108,300 residents; net international migration added roughly 126,000; net domestic migration subtracted roughly 216,000. International migration and natural increase together outpaced domestic out-migration by the narrow margin that produced the small positive headline. ^{17 18}

The domestic out-migration figure is the longer trend. California has recorded negative net domestic migration in every year of the past two decades, with the magnitude varying by economic cycle. The dominant out-migration destinations, sourced from IRS county-to-county migration data, are Texas (particularly Dallas-Fort Worth, Houston, and Austin), Arizona (Phoenix and Tucson), Nevada (Las Vegas and Reno), and Florida (Tampa, Jacksonville, and the South Florida MSAs). These are the same markets that recur as destinations for California 1031 exchanges, and the correlation is not accidental. The capital flow tracks the population flow. ¹⁸

California’s median household income was approximately $100,600 as of 2024, per Federal Reserve-published data drawn from Census American Community Survey estimates. Per capita personal income from the Bureau of Economic Analysis exceeded $81,000 in 2023, and the 2024 real personal income figure showed roughly 5.5 percent growth, among the highest among states. Income concentration is geographically asymmetric. The Bay Area and coastal Los Angeles County submarkets cluster at the high end of the national income distribution; the Central Valley and Inland Empire submarkets cluster well below the state median. ^{19 20}

The major California metropolitan markets relevant to 1031 exchangers are Los Angeles-Long Beach-Anaheim (approximately 12.8 million population), San Francisco-Oakland-Berkeley (approximately 4.6 million), Riverside-San Bernardino-Ontario (the Inland Empire, approximately 4.7 million), San Diego-Chula Vista-Carlsbad (approximately 3.3 million), and Sacramento-Roseville-Folsom (approximately 2.4 million). Each has a distinct asset-class profile. Coastal Los Angeles and the Bay Area concentrate institutional multifamily and office; the Inland Empire is the largest industrial absorption market in the country; Sacramento is the value play across all major asset classes; San Diego is the most balanced. The Central Valley offers the highest cap rates with the longest fundamentals risk.

§5. Unique legal and financial considerations

Several California-specific considerations sit outside the headline tax code and the property-insurance picture, and each is worth surfacing before an exchanger identifies California replacement.

The first is the Bulk Sales Act, codified at California Commercial Code §6101 et seq. The Act applies to bulk sales of business inventory and equipment outside the ordinary course of business and is most often triggered when an investment property is sold together with an operating business (a hotel, a self-storage operation, a restaurant property sold with the going concern, a marina with vessel inventory). Where the Act applies, the buyer must publish notice to the seller’s creditors, hold the purchase price in escrow during a statutory notice period, and clear unpaid sales tax and unemployment liabilities through certificates issued by the California Department of Tax and Fee Administration and the Employment Development Department. Failure to comply exposes the buyer to successor liability for the seller’s debts. For pure real estate transactions, the Act usually does not apply; for blended real estate and operating business transactions, it can be determinative. ²¹

The second is the role of the California Department of Insurance and the California Insurance Code in commercial-property risk allocation. The non-renewal protections that apply to residential property (notice requirements, FAIR Plan eligibility) do not apply with the same force to commercial property. A commercial exchanger whose insurance binder is declined at the eleventh hour has fewer regulatory remedies than a residential buyer in the same position. The recommendation is to bind coverage before exchange identification, not after.

The third is the interaction between California’s community property regime and 1031 exchange structuring. California is one of nine community property states. Title held as community property receives a full step-up in basis at the death of either spouse, which has material implications for the long-term tax planning of an exchange chain. The interaction between community property treatment and §1031 deferral is well-developed in California estate-planning practice and should be reviewed with a California-licensed estate-planning attorney as part of any large or generationally held exchange. The authority is California Family Code §§ 750-853 and the related tax treatment under IRC §1014.

The fourth is the local-option transfer tax stack. The City of Los Angeles Measure ULA is the most consequential at present (covered in §1). San Francisco imposes a graduated documentary transfer tax that reaches 6 percent on transactions above $25 million. Berkeley and Oakland impose substantial local-option transfer taxes on certain property types. Charter cities have broad authority under R&T Code §11911 to impose transfer taxes above the state floor, and the rates and thresholds change at the municipal level on cycles independent of state-level reform. Modeling the disposition side of a California exchange without confirming the current municipal transfer tax stack is a recurring source of avoidable surprise.

§6. Closing summary and the work ahead

The California 1031 exchanger is operating in a market with a clear set of distinguishing features. The federal floor applies; state recognition is full; the claw-back keeps deferred California gain on the books indefinitely; the withholding regime is real but waivable; the property-tax base resets on transfer under Prop 13; the insurance market has structurally repriced and the FAIR Plan has absorbed the gap; the population is roughly flat; out-migration to Texas, Arizona, Nevada, and Florida is consistent across cycles; the local-option transfer tax stack in Los Angeles and San Francisco is materially heavier than elsewhere in the state. None of these is a reason to avoid a California exchange. Each is a reason to underwrite one carefully. The jurisdiction-specific factors above are starting-point context. A state-experienced CRE professional will translate them into deal-specific judgment.

This is the question Shop 1031 was built to compress. Every California offering memorandum on the platform is normalized to a single schema, underwritten at re-let to the buyer’s specific equity, debt, and DSCR floor, and ranked by Dark Shell Score. The buyer searches a pre-cleared field rather than reading offering memoranda to disqualify them. For a market with California’s specific overlay, that compression is more decisive than in markets with a thinner overlay, because the variables that move outcomes (reassessment math, insurance binding, ULA exposure, FTB filing obligation) are knowable in advance and frequently missed in conventional buy-side workflows.

This page is the working map. The actual exchange is run by people. A California-licensed real estate attorney, a California-licensed CPA familiar with §1031 and the state’s claw-back mechanics, a Qualified Intermediary, and a CRE professional who knows this market and these properties. Shop 1031 is the analytics layer that triages which deals deserve your time. The professionals do the work.

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Shop 1031 is an independent analytics platform. We are not a brokerage, a law firm, a tax advisor, a lender, or a Qualified Intermediary. Every 1031 exchange should be reviewed by a state-licensed real estate attorney, a CPA familiar with IRC §1031, and a QI. Brokerage and advisory services, when used, are provided by independently licensed third parties under separate engagement. This page is research, not advice. The California-specific surfaces discussed (FTB Form 3840 claw-back filings, Form 593 withholding waivers, Prop 13 reassessment, Los Angeles Measure ULA exposure, FAIR Plan binding) each carry material risk if mishandled and should be addressed with a California-licensed attorney, a California-resident CPA, and a Qualified Intermediary before identification, not after.

Federal authority: 26 U.S.C. §1031; 26 C.F.R. §1.1031(k)-1.

California authority: Cal. Rev. & Tax. Code §§ 18031.5, 18662, 11911, 24941; FTB Forms 593 and 3840; Cal. Const. Art. XIII A (Proposition 13); Cal. Com. Code §§ 6101 et seq.; Cal. Ins. Code §§ 10089 et seq., 10090 et seq.; Los Angeles Measure ULA (LAMC §21.9.2).

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