California is the most expensive state in the country to sell appreciated real estate: it taxes capital gains as ordinary income at rates up to 13.3% — stacked on top of federal tax — so a long-held California rental can lose more than a third of its gain at sale. A 1031 exchange into a Delaware Statutory Trust lets California investors defer that combined bill, trade active landlording for passive institutional real estate, and keep their equity compounding.
~37.1%Est. combined tax if you sell
13.3%Top state rate on gains
4.5–6.0% multifamilyIllustrative cap rates
How California taxes a property sale
State treatment. Taxed as ordinary income — no preferential long-term rate.
Nonresident withholding. 3⅓% (3.33%) of sale price withheld at closing (Form 593) unless an exemption — including a 1031 exchange — applies.
Clawback. Form 3840 — annual like-kind exchange return required when CA property is exchanged into out-of-state property; the deferred CA-source gain is tracked until recognized.
Does California conform to Section 1031?
Yes — a qualifying exchange defers state tax alongside federal.
California recognizes IRC §1031, so a qualifying exchange defers California tax as well as federal tax.
Passive replacement property with a DST
Many California owners use a Delaware Statutory Trust as replacement property — institutional real estate, professionally managed, that qualifies for 1031 treatment and can absorb both the equity and the debt from the sale.
Yes. Because California conforms to IRC §1031, California investors can complete a DST 1031 exchange — selling appreciated California property and exchanging into a Delaware Statutory Trust (DST) — to defer both California and federal capital-gains tax. The DST does not have to hold California real estate; you can exchange into professionally managed, institutional-grade property anywhere in the country while your California-source gain stays deferred and is tracked on Form 3840. A DST lets California owners trade active landlording for passive, fractional ownership, typically at a lower minimum than buying a whole replacement property outright.
What is the capital gains tax rate in California?
California has no separate capital gains rate — gains are taxed as ordinary income from 1% up to 13.3% (the top rate includes a 1% Mental Health Services surcharge on income over $1 million). Combined with the federal 20% long-term rate and the 3.8% net investment income tax, a top-bracket Californian can face roughly 37% on a real estate gain.
Does California recognize 1031 exchanges?
Yes. California conforms to IRC §1031, so a properly structured exchange defers California tax as well as federal tax. If you exchange California property for replacement property outside California, you must file Form 3840 each year to report the deferred California-source gain.
What is California Form 3840?
Form 3840 is California's annual like-kind exchange information return. When you defer gain on California property by exchanging into out-of-state property, California tracks that deferred gain and expects Form 3840 filed every year until the gain is recognized — the state's 'clawback.'
Do I owe California tax if I exchange into out-of-state property?
Not at the time of the exchange if it qualifies under §1031 — but the California-source gain is deferred, not erased. California can tax it when it is eventually recognized, which is why Form 3840 reporting is required.
Are Delaware Statutory Trust (DST) properties available to California investors?
DST offerings rotate frequently and are available only to accredited investors, so current Delaware Statutory Trust options for California investors are not published on the site. California residents can exchange into any of Baker 1031's nationwide DST offerings — a DST does not need to be located in California to defer your California and federal gain. Request listings access to see which DST 1031 replacement properties are open this week.
Selling appreciated property in California?Request access