California 1031 Exchanges Shift to Diligence and Deadlines
Over the last two years, the conversation around 1031 exchanges has sharply focused on pricing, with investors watching for signs that values were bottoming and cap rates stabilizing. But now that has shifted to pricing not being a sole or even a primary hurdle; as investors navigate around high borrowing costs, they are starting the process early in markets including California.
Smooth execution of these transactions within the strict 45- and 180-day deadlines without identification, financing and closing challenges has increasingly become the focus, according to Ashley Stefan, divisional counsel at First American Exchange Company & Host of The 1031 Brief™ Podcast.
As more buyers return to the market, competition for replacement properties is shortening due diligence timelines, particularly in competitive markets like California, Stefan told GlobeSt.com.
"In California and across the country, successful investors are often starting earlier, using the 45-day identification period to confirm a broader set of already-vetted opportunities, rather than discover new ones," Stefan said.
"The exchange itself is also being used as a strategic tool.
Rather than treating a 1031 as a one-time tax deferral tool, investors are increasingly using exchanges to reposition portfolios, reduce exposure to certain asset classes, enter new markets, improve business assets, gain exposure to institutional-quality assets through structures like Delaware Statutory Trusts (DSTs) or ensure access to ideal properties through reverse exchange parking transactions, Stefan said.
These exchanges often surface in federal tax reform conversations, typically as a potential revenue offset in larger budget negotiations. In 2026, the more consequential federal development doesn't directly target Section 1031.
The 21st Century ROAD to Housing Act, signed into law on July 11, 2026, restricts large institutional investors who own 350 or more single-family homes from acquiring additional ones, with exemptions for new construction intended for the rental market.
California itself made two prior attempts at similar restrictions this year, yet neither survived the legislative process. AB 1611 would have removed the 1031 eligibility for owners of 50 or more qualifying rental properties and AB 1240 would have barred owners of 1,000 or more single-family homes from acquiring more.
Both stalled, leaving the federal cap as the operative restriction in the state. California also adds its own layer of exchange-specific reporting: investors who exchange a California property for an out-of-state replacement asset must file FTB Form 3840, an annual filing that tracks the deferred gain until it is ultimately recognized.
Source: GlobeSt/ALM