1031 Exchanges for San Gabriel Valley Investors

What is a 1031 exchange?

Section 1031 of the Internal Revenue Code lets an owner of business or investment real property sell it and buy other like-kind real property without recognizing the gain at the time of the exchange. The tax is deferred, not forgiven: the gain carries into the replacement property and is generally recognized when that property is later sold in a taxable sale.

For a San Gabriel Valley owner who bought a rental house or a duplex years ago, the deferred gain can be a large share of the sale price. That is why exchanges come up so often when local investors trade a house for a small multifamily building, or a small building for a larger one.

Confirm every exchange with a CPA and a qualified intermediary before you sell. The rules below are a summary, and the details of your basis, depreciation, debt and ownership structure decide how they apply.

What property qualifies?

According to the IRS:

• Both sides must be real property held for business or investment. Since 2018, Section 1031 applies only to real property, not to equipment, vehicles or other personal property.
• "Like-kind" is broad for real estate. Properties are like-kind if they are of the same nature or character, even if they differ in grade or quality. Improved and unimproved real property are generally like-kind to each other, so a rental house can be exchanged for an apartment building or land held for investment.
• U.S. property is not like-kind to property outside the United States.
• Property held primarily for sale does not qualify. A house bought to renovate and resell quickly can be treated as held for sale rather than for investment. If you are buying a fixer-upper to flip, do not plan on exchanging the profit.

The IRS instructions for Form 8824 add that Section 1031 does not apply to a home used solely as your personal residence at the time of the exchange. A separate rule, Section 121, may let you exclude gain on a home you owned and lived in as your main home for at least 2 of the 5 years before the sale.

What are the 45-day and 180-day deadlines?

Most exchanges are deferred: you sell the old property (the "relinquished" property) first and buy the replacement later. The IRS Form 8824 instructions set two deadlines, both counted from the date you transfer the relinquished property:

• 45 days to identify. The replacement property must be identified in writing within 45 days.
• 180 days to receive it. The replacement property must be received within 180 days, or by the due date (including extensions) of your tax return for the year of the transfer, whichever is earlier.

The two clocks run at the same time. The 180 days include the first 45.

Step	Deadline	Example: sale closes Oct 15, 2026	Example: sale closes Dec 1, 2026
Relinquished property transfers	Day 0	Oct 15, 2026	Dec 1, 2026
Replacement property identified in writing	Day 45	Nov 29, 2026	Jan 15, 2027
Replacement property received	Day 180, or the tax return due date if earlier	Apr 13, 2027	May 30, 2027, but only if the 2026 return is extended; otherwise the return's due date comes first

The December example is the common trap. For a calendar-year individual, the 2026 return is normally due in April 2027, before day 180. Unless the return is extended, the exchange period ends at the return due date. Ask your CPA about the extension before the sale closes, not after.

How do you identify replacement property?

Identification has to be in writing and delivered on time. The Form 8824 instructions say real property should be described by a legal description, street address or distinguishable name, and the written identification must be sent to the required party by day 45.

The Treasury regulations, at 26 CFR 1.1031(k)-1, limit how many properties you can name:

• Three-property rule: up to three properties of any value.
• 200% rule: any number of properties, as long as their combined fair market value does not exceed 200% of the value of the property you sold.
• 95% exception: if you identify more than either rule allows, the identification can still count if you actually acquire at least 95% of the value of everything you identified.

In practice, many investors name a first choice and two backups. San Gabriel Valley small multifamily inventory is thin (see the investor hub for 2–4 unit sales by city), so having backups identified matters.

Why do you need a qualified intermediary?

If you receive the sale proceeds yourself, the exchange can fail. In a deferred exchange, a qualified intermediary (QI) holds the proceeds and handles the transfer and receipt so they are treated as an exchange. The Form 8824 instructions warn that if timing fails because of the QI, the transaction will not qualify as a deferred exchange, so choose a QI carefully.

Not everyone can serve as your QI. Under the Treasury regulations, a person who acted as your employee, attorney, accountant, investment banker or broker, or real estate agent or broker within the two years before the transfer is a "disqualified person." That includes your real estate agent. Kelvin can help you find and buy replacement property, but he cannot hold your exchange funds.

What is boot, and what makes part of the gain taxable?

You can receive something other than like-kind property in an exchange, but it is taxable. The IRS says that if you receive money or other property that is not like-kind, you must recognize gain up to the value of that money or property. You also cannot deduct a loss on a like-kind exchange.

Two forms of boot catch people:

• Cash out. Any proceeds you take rather than reinvest.
• Debt relief. The Form 8824 instructions count net liabilities assumed by the other party (the debt paid off on your old property, beyond the debt you take on or cash you add) alongside cash received.

That is why exchange planning usually aims to buy property of equal or greater value and to replace the debt that was paid off, either with new debt or added cash. Trading down in price or debt usually creates taxable boot. Your CPA can calculate the numbers for your situation.

What about related parties?

Exchanges with family members or related entities have an extra rule. The Form 8824 instructions define related parties to include your spouse, child, grandchild, parent, grandparent, brother, sister or a related corporation. If you or the related party disposes of the exchanged property within two years of the last transfer, the deferred gain generally becomes reportable that year, unless an exception applies.

What does California add?

California generally follows the federal deferral, with two rules that matter to San Gabriel Valley sellers.

FTB 3840 when you exchange out of state

If you exchange California real property for like-kind property outside California, the Franchise Tax Board requires form FTB 3840, California Like-Kind Exchanges. It must be filed for the year of the exchange and for each later year, generally until the California-source deferred gain is recognized. This is sometimes called California's "clawback": the state keeps the right to tax the gain earned on the California property when you eventually sell the replacement property, even if you no longer live in California.

The requirement applies regardless of where you live. If you do not file the form or a return, the FTB may issue a Notice of Proposed Assessment for the deferred gain plus penalties and interest.

Form 593 withholding at closing

California generally requires withholding on sales of California real property, reported on Form 593, which the seller gives to escrow before closing. The Form 593 instructions cover exchanges:

• A deferred like-kind exchange is exempt from withholding at the time of the initial transfer.
• If the seller receives money or other property exceeding $1,500 from the sale in addition to the exchange property, the QI must withhold.
• If the exchange does not happen or does not qualify, the intermediary must withhold 3 1/3% of the sales price.

What are the common exchange paths for SGV investors?

Most San Gabriel Valley exchanges start with a single-family rental or a small multifamily building. Here is what those properties were selling for in the cities with the most small-multifamily activity, from October 2025 to September 2026:

City	Single-family median	Single-family sales	2–4 unit median	2–4 unit sales
Pasadena	$1.55M	651	$1.30M	55
Alhambra	$1.04M	139	$1.23M	44
El Monte	$784K	148	$1.05M	37
Rosemead	$924K	126	$1.27M	26
San Gabriel	$1.25M	192	$1.37M	20

Three paths come up most often.

1. Single-family rental into 2–4 units. An owner trades one house for a duplex, triplex or fourplex, often in the same part of the valley. Alhambra had the most 2–4 unit sales relative to single-family sales of the ten cities tracked, so it is a natural place to look. Check local and state rent rules on any occupied building first; see rent control.

2. Small multifamily into 10+ units. Owners of one or more small buildings exchange into a larger apartment building, which puts the units under one roof and one management plan. That is the focus of the Principle Quality Investments team, of which Kelvin is a member. See multifamily.

3. California into another state. Some owners exchange into property elsewhere. That is allowed, but it triggers the annual FTB 3840 filing described above.

What are the most common 1031 mistakes?

• Touching the money. Closing the sale without a QI in place, or taking proceeds out of escrow, can end the exchange.
• Starting the search after the sale. In a thin market, 45 days goes quickly. Shortlist replacement property before the relinquished property closes.
• Missing the tax return due date. On a sale late in the year, the return due date can cut the 180 days short unless the return is extended.
• Identifying too loosely. Vague descriptions or too many properties can invalidate the identification.
• Trading down without planning for boot. Buying for less, or with less debt, usually makes part of the gain taxable.
• Exchanging a flip. Property held primarily for sale does not qualify.
• Forgetting California. Out-of-state replacement property means filing FTB 3840 every year until the gain is recognized.

How Kelvin and PQI fit in

Kelvin Huang is a Keller Williams Executive agent in Alhambra who works with single-family investors across the San Gabriel Valley and is part of Principle Quality Investments, a multifamily team focused on 10+ unit buildings across Los Angeles and on 1031 exchange strategies. On an exchange, the agent's job is to price the property you are selling, find and negotiate replacement property that fits the deadlines, and coordinate with your QI, CPA and escrow. The tax and legal decisions belong to your CPA, attorney and QI.

Frequently asked questions

How long does a 1031 exchange take to complete?

Replacement property must be identified in writing within 45 days of the sale and received within 180 days, or by the due date of your tax return (including extensions) if that comes first.

Can a rental house be exchanged for an apartment building?

Generally yes. The IRS treats improved and unimproved real property as like-kind to each other when both are held for business or investment, so a rental house can be exchanged for a multifamily building. Confirm with your CPA.

Can a real estate agent hold the exchange funds?

No. Under the Treasury regulations, someone who acted as your real estate agent or broker in the two years before the transfer is a disqualified person and cannot be your qualified intermediary.

What has to be filed with California?

If you exchange California property for property in another state, you file form FTB 3840 for the year of the exchange and each later year until the deferred gain is recognized. At closing, the seller also provides Form 593 to escrow for withholding purposes.

Does a 1031 exchange work on a primary residence?

Not if the home was used solely as your personal residence. A separate exclusion, Section 121, may apply to a main home. Ask your CPA how the two interact if part of the property was rented.

What happens if no replacement is found in time?

The exchange fails and the sale is generally taxable. In California, the intermediary must withhold 3 1/3% of the sales price on a failed exchange.

Sources

• IRS: Like-kind exchanges, real estate tax tips
• IRS: Instructions for Form 8824, Like-Kind Exchanges
• IRS: About Form 8824
• 26 CFR 1.1031(k)-1, Treatment of deferred exchanges
• California FTB: 2025 Instructions for Form FTB 3840, California Like-Kind Exchanges
• California FTB: Real estate withholding
• California FTB: 2026 Instructions for Form 593, Real Estate Withholding Statement