For owners of Bay Area rental property
Sell the rental. Keep the deferral. Keep the title. Stop managing.
For owners of one to four Bay Area rentals, held for years, who are wondering what comes next, and whether the tax bill has to be part of the answer.
Why owners are looking again
Managing it has stopped being worth it. Tenants, repairs and rental rules take time that many owners would now rather spend elsewhere.
The rent no longer matches the value. A house that has appreciated for decades can return a small share of what it is now worth.
The next generation. Owners are thinking about what they leave, and in what form.
The tax bill has been the reason not to sell. For many owners, it is the capital gains tax, more than the market, that keeps a property off the market.
There is a way to defer it. A 1031 exchange can defer that tax when the proceeds go into other real property held for investment.
What the tax bill is made of
If a long-held rental is simply sold, the gain can be taxed in several layers:
- Federal capital gains tax, at up to 20%.
- Depreciation recapture. The part of the gain that reflects depreciation taken over the years is taxed at up to 25% federally.
- Net investment income tax of 3.8%, above certain income levels.
- California income tax, which treats capital gains as ordinary income, at rates up to 13.3%.
On a property held for decades, those layers together can take a large share of the gain. Your CPA can put your own numbers against each line, and we’re glad to help start that conversation.
How an exchange works
1. Plan before you list. Talk with your agent, your CPA or attorney, and us. The exchange needs to be set up before the sale closes, so the earlier this conversation happens, the better.
2. Sell. The sale proceeds go to a qualified intermediary, not to you. From the day the property transfers, you have 45 days to identify replacement property in writing, and until the earlier of day 180 or your tax return’s due date (with extensions) to complete the purchase.
3. Replace. You buy replacement real property, held for investment, with title in your name. The gain stays deferred for as long as the exchange rules are met.
A 1031 exchange defers tax. It does not erase it.
Where the equity can go
Into real property you own directly, in California or another state. We partner with a curated network of specialists focused exclusively on single-family residential, multifamily, self-storage and select triple-net assets. See the four property types.
We’ll walk through the options, and what each asks of you, in conversation. Every property carries its own risks, and nothing on this site is a recommendation of any particular property.
If you buy outside California
California keeps track of gain it deferred. When California property is exchanged for property in another state, California requires an annual filing, FTB Form 3840, for as long as the gain stays deferred, and it can tax that California gain when the replacement property is later sold in a taxable sale. It is part of the plan from the start, not a surprise at the end.
Who does what
- Your agent lists and sells your property, and stays your agent.
- Tax Deferred Wealth coordinates the plan and introduces replacement options.
- Institutional 1031 is the qualified intermediary for exchanges in this program. It holds exchange funds under written exchange agreements and does not advise on the suitability of any replacement property.
- Your CPA or attorney advises you on your own taxes. We encourage you to bring them in early.
Bring your advisor in
Your CPA or attorney will want to see the structure and the rules behind it. We wrote a page for them.
Questions owners ask
Does an exchange mean no tax? No. A 1031 exchange defers the tax on the gain; it does not remove it. Some parts of a transaction, such as cash you keep, can be taxed in the year of the sale.
How long do I have? 45 days from the sale to identify replacement property in writing, and until the earlier of day 180 or your tax return’s due date, with extensions, to complete the purchase. The IRS can postpone these deadlines after a declared disaster, but not because a deal became difficult.
Do I have to buy in another state? No. Replacement property can be anywhere in the United States. Some owners stay in California; others look elsewhere for property that suits them better.
Can I replace one property with several? Often, yes. The identification rules allow more than one replacement property, within limits your intermediary will explain.
What about my mortgage? Debt paid off on the sale generally needs to be offset, by debt on the replacement property or by adding cash, to defer the whole gain. Your CPA can tell you how this applies to you.
Can I exchange again later? Generally, yes, as long as the property is held for investment and the rules are met each time.
Should I talk to my CPA or attorney? Yes, before you list. We are happy to talk with them directly.
Ready to talk it through?
A conversation costs nothing and commits you to nothing.
Talk to us · Call 408‑655‑9296