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.
The California tax math
Here's the tax stack on a long-held rental sold for a $1.5M gain (excludes depreciation recapture, taxed separately at up to 25%):
| On a $1.5M gain | Tax |
|---|---|
| Federal long-term capital gains (20%) | $300,000 |
| Net investment income tax (3.8%) | $57,000 |
| California income tax (13.3%) | $199,500 |
| Total if you simply sell | $556,500 |
| Tax if you 1031 into a DST | $0 deferred |
In California's top bracket, roughly the combined rate above goes to tax if you sell outright — versus $0 now with a qualifying 1031 exchange. Run your California numbers →
California 1031 rules
Rules summarized as of 2026 — verify with your tax advisor.
Conforms to federal §1031
California recognizes IRC §1031, so a qualifying exchange defers California tax as well as federal tax.
Clawback / reporting
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.
Withholding at sale
3⅓% (3.33%) of sale price withheld at closing (Form 593) unless an exemption — including a 1031 exchange — applies.
How gains are taxed
Taxed as ordinary income — no preferential long-term rate.
California market snapshot
Illustrative — wire to a market-data feed; refreshed quarterly.
Baker 1031 in California
Realized (acquired, held, sold) programs on California assets. Joined from full-cycle-deals.csv; sponsor-reported, net-to-investor, not independently verified; past performance ≠ future results.
| Program | Sponsor | Avg annual | Equity × | Hold |
|---|---|---|---|---|
| Laguna Park Equities Group — Stockton | Time Equities | 18.43% | 2.04x | 4.9 yr |
| Prospect Drive Equities LLC — Rancho Cordova | Time Equities | 14.92% | 2.24x | 6.64 yr |
| Placerville Equities LLC — Rancho Cordova | Time Equities | 17.75% | 2.63x | 6.95 yr |
| National Archives & Records — Riverside | Syndicated Equities | 3.46% | 1.41x | 10.1 yr |
| Sun Microsystems DST — San Jose | Net Lease Capital | 11.48% | 3.97x | 12.69 yr |
| Norwalk Office Building — Norwalk | Syndicated Equities | 1.55% | 1.26x | 15 yr |
See every California deal in the Data Center →
Current offerings for California investors
DST sponsors based in California
Learn more
California FAQ
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.
Disclosures
This page is educational and is not investment, tax, or legal advice, or an offer to sell or a solicitation to buy any security. State tax and 1031 rules summarized here are general, current as of 2026, and not tax advice — verify with your CPA and attorney. For accredited investors only. Representatives may transact business only in states where registered or exempt. Securities offered through Aurora Securities, Inc., member FINRA/SIPC; Baker 1031 Investments, LLC is independent of Aurora. Performance shown is sponsor-reported, realized programs only, net of fees, not independently verified, and not indicative of future results.