Sacramento 1031 Exchange

A 1031 exchange lets you sell an investment or business-use property and roll the entire proceeds into another investment property without paying federal capital gains tax at the time of the sale. The tax is deferred, not erased.

The rule comes from Section 1031 of the Internal Revenue Code, on the books since 1921. Since 2018 it applies to real property only — equipment, vehicles, and other personal property no longer qualify.

You cannot touch the money. A qualified intermediary has to hold the proceeds from the moment your sale closes. If the funds hit your account, your escrow’s account, or your attorney’s trust account first, the exchange is over and there is no way to fix it.

You have 45 calendar days from the closing of your sale to formally identify replacement property in writing, and 180 calendar days to close on it.

Three things trip people up:

• The clocks run at the same time. Day 45 sits inside the 180. There is no 225-day window.
• They are calendar days. Weekends and holidays count, and there is no next-business-day grace.
• The 180 days is capped at your tax return due date, including extensions. A sale closing in late October or later can cut your window short unless you file an extension. Partnerships and S corporations lose time even faster because of the earlier March filing deadline.

After day 45 you cannot revoke or substitute an identification. If everything you identified falls apart, the exchange fails.

Basis, mostly. Sacramento multifamily trades at roughly $209,806 per unit against the Bay Area’s $313,445 — about a third less — at a wider cap rate. Against core San Francisco, Peninsula, or South Bay product, the pickup runs 135 to 190 basis points.

It isn’t universal. An East Bay Class B owner is looking at 25 to 75 basis points, which may not justify the move on yield alone.

The second driver is management. The typical exchanger is 58, holds about 75% equity, and has owned the property roughly eight and a half years. Trading an aging rental for a lease-driven commercial asset is often the actual goal, and the yield is secondary.

Since January 2022, 355 Sacramento-area commercial properties have traded through 1031 exchanges — about $1.13 billion, or 5.4% of all commercial sales in the region.

The rate has fallen sharply. In 2022 it was 9.2%, roughly one transaction in eleven. By 2026 it was 2.9%, closer to one in thirty-three. Total commercial transactions fell over the same period but recovered from their 2024 low; exchanges did not.

Our read is that this is an execution problem rather than a demand problem. Nothing about the tax treatment changed. What changed is that finding replacement property inside 45 days got harder — nationally, identification failures rose from 6% to 9% of all exchanges.

These figures come from our own analysis of CoStar transaction data. CoStar’s 1031 flag depends on disclosure, so the true count is likely somewhat higher, and recent years may revise upward as research completes.

More than most owners expect, because four separate taxes stack.

Take an illustrative commercial building bought for $1,500,000 and held fifteen years, now selling for $3,000,000. After roughly $461,000 of depreciation, the taxable gain is about $1,961,000. On that gain a top-bracket California resident would face:

• 25% federal tax on the depreciation portion
• 20% federal long-term capital gains on the rest
• 3.8% net investment income tax
• Up to 13.3% California income tax — California has no preferential capital gains rate

That is roughly $750,000, an effective rate near 38% of the gain, and closer to 42% on the depreciation slice. California also withholds 3⅓% of the sales price at closing — another $100,000 on a $3,000,000 deal.

One correction worth knowing: California’s top rate on a property sale is 13.3%, not 14.4%. The extra 1.1% you see quoted is SDI, a payroll tax on wages, and it never touches a capital gain. The 13.3% itself is two separate pieces. The first is California’s 12.3% top marginal bracket. The second is a 1% Behavioral Health Services Tax that applies only to California taxable income above $1,000,000, and only to the portion above that line. An owner under $1,000,000 of California taxable income tops out at 12.3%. The 1% surcharge was created by Proposition 63 in 2004 and renamed by Proposition 1 in March 2024. The full California mechanics are on the California 1031 clawback page.

Illustration only. Your numbers depend entirely on your basis, holding period, entity structure, and bracket. Run them with your CPA.

No. Replacement property can be anywhere in the United States, and roughly 60% of exchanges cross state lines.

Sacramento sellers typically look three directions: staying local for management proximity, moving into El Dorado or Placer County for the growth trajectory, or going out of state into no-income-tax markets. On that third path, the four routes we get asked about are Nevada, Texas, Idaho, and Arizona. Idaho is the one people misjudge, because it is not a no-tax state at all.

What matters more than geography is whether there is something worth buying on day 44. That is where exchanges actually break. And if nothing is worth buying on day 44, paying the tax may be the better outcome. Is a 1031 exchange worth it, or should you just pay the tax runs both routes on a worked Sacramento example.

If you exchange California property for replacement property outside California, the state permanently tracks the California-source gain you deferred. When you eventually sell that out-of-state property in a taxable sale, California taxes that original gain — even if you have moved away by then.

The rule is Revenue & Taxation Code Section 18032, enacted in 2013 and effective for exchanges beginning in 2014.

It comes with a filing obligation most people miss: FTB Form 3840, filed for the year of the exchange and every year after that, until the deferred California gain is finally recognized. There is no sunset. Exchanging again into a third property does not end it. And you still have to file even if you no longer have any other California filing obligation.

The practical risk is not a late-filing penalty. It is that California’s four-year statute of limitations runs from the filing of a return — so if you never file, the clock never starts, and the exposure stays open indefinitely. The Franchise Tax Board runs an active compliance program on exactly this form.

Buying in Texas or Nevada does not avoid this. Destination state choice affects the tax on future appreciation, not the California gain you already deferred.

No. Section 1031 is an income tax provision and has no effect on property tax.

Buying the replacement property is a change in ownership under Proposition 13, so it is reassessed at full market value with a new base year. There is no base-year-value transfer for commercial or investment property — that only exists for principal residences.

Proposition 19 does not help commercial investors. Its parent-child exclusion no longer covers rental property, vacation homes, or commercial property.

Budget the new assessment as a real line item. On a $3,000,000 replacement, expect roughly $33,000 to $37,500 a year regardless of your old base.

One Sacramento-specific trap: documentary transfer tax in the City of Sacramento is $3.85 per $1,000 of value, against $1.10 in unincorporated Sacramento County, Folsom, Elk Grove, Citrus Heights, Rancho Cordova, and Galt. On a $3,000,000 purchase that is an $8,250 difference based purely on which side of a city line the building sits. There is no 1031 exemption from transfer tax.

Between 8% and 10% of exchanges fail, and the reason is almost never paperwork. Across a network of more than thirty qualified intermediaries, identification failures rose from 6% to 9% of all exchanges — and the stated cause is overwhelmingly the inability to find suitable replacement property in a tight market.

The other common killers:

• Closing the sale before the exchange was set up. Unfixable.
• Sending the identification to your own attorney, CPA, or agent — a disqualified person, which voids it.
• Taking back a seller-carried note payable directly to you, which is treated as taxable boot.
• A lender requiring a different ownership entity mid-exchange, breaking the same-taxpayer rule.

The mechanics are the easy part — a good intermediary handles them. Finding something worth buying inside 45 days is the hard part, and that work has to start before you list.

Yes. “Like-kind” is far broader than most owners assume. Any real property held for investment or productive use in a trade or business can be exchanged for any other — a rental house into retail, a duplex into industrial flex, raw land into a medical office building.

Your primary residence does not qualify. Property held primarily for resale does not qualify.

The profile is consistent. The typical exchanger is around 58 years old, holds roughly 75% equity in the property they are selling, and has owned it about eight and a half years.

Three signals matter most:

• A low basis relative to today’s value, meaning a large embedded gain
• Tired of active management, and open to a lease-driven asset instead
• Enough runway to line up replacement property before listing, not after

If you are within about twenty-four months of selling, that is the right time to have the conversation.