Thinking about selling an investment condo in Newport Beach or swapping a small multifamily in Anaheim or Irvine without a big tax bill this year? A 1031 exchange can help you defer federal taxes when you trade one investment property for another. The rules are strict, but with planning you can move your equity into a better asset while keeping more of your capital working for you.
In this guide, you’ll learn how 1031 exchanges work, the 45/180 day timelines, how to identify replacement properties, what “boot” means, and common Orange County pitfalls to avoid. You will also see simple examples for coastal condos and small multifamily. Let’s dive in.
What a 1031 exchange does
A Section 1031 like-kind exchange lets you defer federal income taxes when you sell real property held for investment or for use in a trade or business and buy qualifying replacement real property. The goal is tax deferral, not elimination. Your deferred gain and depreciation carry into the next property and are typically recognized when you sell outside a 1031 in the future.
Eligible properties include investment condos and small multifamily buildings. Your primary residence does not qualify. Personal property does not qualify under current federal law. State tax treatment can differ, and you must follow California reporting rules.
Several parties help you succeed:
- You as the exchanger.
- A Qualified Intermediary, often called a QI, who holds the funds so you never touch the proceeds.
- Your broker or agent to coordinate timelines and find replacement options.
- Title and escrow to close both sides with QI instructions.
- A tax advisor or CPA to guide reporting and basis tracking.
You report the exchange on IRS Form 8824 for the year you sell the relinquished property.
The 45/180 rule
Two deadlines drive every 1031. They are calendar days and not extendable.
- Identification period: 45 days from the date you close the sale of your relinquished property to identify replacement property in writing and deliver it as required, often to the QI.
- Exchange period: 180 days from that same sale closing date to acquire the replacement property. In some cases, your tax return due date can shorten this period. In practice, treat 180 days as your hard stop.
Missing either deadline usually means you recognize the gain. Build your plan around these dates from day one.
Identification rules made simple
Your identification must be unambiguous, in writing, and delivered on time. You have three ways to structure it:
- Three-property rule: Identify up to three properties of any value.
- 200 percent rule: Identify any number of properties as long as the total value does not exceed 200 percent of the value of what you sold.
- 95 percent rule: If you identify more than the 200 percent limit, you must acquire at least 95 percent of the total value you identified.
Work with your QI on wording and delivery so your identification is valid.
Avoiding boot and replacing debt
“Boot” is any non-like-kind value you receive. Boot is taxable to the extent of gain. Common sources are cash left over and a net reduction in debt.
To fully defer gain, aim to:
- Buy replacement property of equal or greater value than what you sold.
- Replace equal or greater debt. If you take on less debt, add cash to cover the difference.
Example for a Newport Beach investment condo:
- Sale price: 1,400,000
- Mortgage payoff: 300,000
- Net proceeds after closing costs: 1,050,000
To fully defer, target replacement property at or above 1,400,000 and replace at least 300,000 in debt or add equivalent cash. If you buy at 1,200,000 and take 200,000 in cash back, that 200,000 is boot and may be taxable.
Local pitfalls in Orange County
Exchanges in Newport Beach and across the Anaheim–Santa Ana–Irvine corridor come with practical hurdles. Plan for these early:
- HOA costs and timing: Many coastal condos have HOA transfer fees or capital contributions that affect net proceeds and scheduling.
- Rental rules: Newport Beach and other coastal cities have short-term rental restrictions or registration requirements. These affect returns and can impact which properties you identify.
- Thin inventory at the coast: High-value condos near the water can be limited. Use the three-property or 200 percent rule for flexibility within the 45-day window.
- Multifamily lending timelines: Loans for 2 to 10 units often have different underwriting and appraisal timing than condo loans. In Irvine or Anaheim, competition and lender pace can compress your 180-day window.
- Tenant considerations: Leases and local landlord-tenant rules can affect valuation and due diligence. Build in time for document review.
- Nonresident withholding: California has rules for nonresident sellers. Coordinate with a California tax professional to handle withholding exceptions for exchanges when applicable.
- QI quality: Choose a bonded, reputable QI with clear procedures. Inexperienced providers can cause missed steps or delays.
Reverse and improvement exchanges
If you must buy before you sell, a reverse exchange may fit. An exchange accommodation titleholder holds one of the properties temporarily while you complete the sale. Timelines are still tight and rules are strict.
If you need to improve the replacement property, an improvement exchange can let you build or renovate during the exchange period through a specialized structure. Both strategies require experienced QI support and early planning.
Related parties and holding period
Transactions with related parties have extra restrictions. If a related party disposes of property within certain time frames, your deferral can be at risk. Bring your tax advisor in early if family or entity ties are involved.
There is no bright-line federal holding period for proving investment intent. The IRS looks at your facts and circumstances. Many practitioners favor a longer holding period to support investment intent, often at least 1 to 2 years, along with consistent investment behavior.
Step-by-step checklist
Use this concise checklist to stay on track.
Before you list
- Meet with a qualified tax advisor to confirm eligibility, objectives, and reporting needs.
- Select a reputable Qualified Intermediary and review their procedures and fees.
- Define goals: full or partial deferral, target asset type, markets, and financing plan.
- Pre-screen replacement options for lender readiness, HOA rules, rental restrictions, and title issues.
During the sale
- Insert QI instructions into escrow so proceeds move directly to the QI at closing.
- Line up loan payoff timing to avoid unintended boot from debt changes.
- Prep identification drafts early. Validate property descriptions and delivery method with the QI.
Within the 45-day window
- Use the three-property or 200 percent rule to build flexibility.
- Confirm each identification is unambiguous and delivered in writing to the correct party.
- Keep a calendar of all deadlines. Share it with your agent, lender, escrow, and QI.
Before 180 days expires
- Push underwriting and appraisals early for multifamily. Consider assumable loans or strong pre-approval to save time.
- Align all contingency removals with the exchange deadline. Avoid extensions that drag beyond 180 days.
- If timelines do not match, discuss a reverse or improvement exchange with the QI and tax counsel.
After closing
- Gather and store all exchange documents: QI agreement, identification notices, closing statements, escrow instructions, and title reports.
- File IRS Form 8824 with your federal return for the year of the sale. Provide your CPA with the complete paper trail.
Reporting and tax notes
You will file Form 8824 for the year you sell the relinquished property. Keep accurate basis records, including adjustments for boot and liabilities. Depreciation does not disappear in an exchange. It is generally deferred and can be subject to unrecaptured Section 1250 gain rules later, which are typically taxed at a maximum federal rate of 25 percent when recognized.
California often follows federal concepts for exchanges, but state filing and nonresident withholding rules are separate. Confirm current Franchise Tax Board guidance with a California tax professional.
When to call in the pros
Bring in professional help if you have any uncertainty about eligibility, related parties, or timing. Complex structures like reverse or improvement exchanges require specialized QI support. Cross-state issues and large gains make early tax advice even more important.
If you want a process-driven plan for the Orange County market, our senior-led team can coordinate your timeline, line up replacement options across Newport Beach, Irvine, Anaheim, and Santa Ana, and keep escrow and the QI moving. For bilingual support, we serve clients in English and Mandarin. Ready to map your exchange and explore replacement inventory? Connect with Mike Chen for a friendly, no-pressure conversation.
FAQs
What is a 1031 exchange for California investment property?
- A 1031 exchange is a tax-deferral strategy that lets you sell real property held for investment or business use and buy qualifying replacement real property while deferring federal taxes.
How do the 45-day and 180-day deadlines work in a 1031?
- You must identify replacement property in writing within 45 days after your sale closes and acquire it within 180 days, with no extensions for weekends or holidays.
Which properties qualify as like-kind in Orange County?
- Investment real property is generally like-kind to other investment real property, such as a Newport Beach condo exchanged for a small multifamily building in Irvine.
What is “boot” in a 1031 exchange?
- Boot is non-like-kind value you receive, such as cash back or net debt relief, and it is taxable to the extent of gain recognized.
Can I exchange into multiple replacement properties?
- Yes, you can identify up to three properties regardless of value or use the 200 percent rule to identify more properties within value limits, subject to strict identification rules.
Do I need a Qualified Intermediary to complete an exchange?
- Yes, a QI is needed to hold proceeds and structure the exchange so you do not receive the funds, which helps preserve tax deferral.
How is depreciation handled in a 1031 exchange?
- Depreciation is deferred into the replacement property and may be subject to recapture when you eventually sell outside a 1031, with unrecaptured Section 1250 gain generally taxed up to 25 percent.
