We simplify
1031 exchanges.
From California to wherever comes next. One broker. End to end.
If you own commercial property in California, odds are you didn’t plan for the position you’re now in. You bought one building. Then another. You held through cycles, and at some point the balance sheet tilted more Californian than you intended. The basis is good. The equity has compounded. The tax bill, if you ever sell, is a number you’d rather not look at twice.
That’s the starting point for most of the conversations we have on this service line. What follows is how those conversations tend to go: what a 1031 exchange can and cannot do for a California owner, which state-specific rules change the math, where the capital we’ve helped clients redeploy is actually going, and what ARCA does to execute the trade.
It is not tax advice, and it is not a QI service pitch. Arbor Realty Capital Advisors is a licensed California (and Georgia) commercial real estate brokerage. We broker the trade; your CPA, attorney, and Qualified Intermediary handle their respective roles.
We execute the disposition on the California side and orchestrate the acquisition on the replacement side. We’re also retained on engagements where the property is already under contract, brought in to run the replacement search, identification, and acquisition orchestration mid-stream. This page explains the decision; the execution is a team effort and we’ll introduce you to the rest of that team if you need one.
Why California owners are rethinking the hold.
The case for holding California commercial real estate used to be easy to make. Coastal supply constraint. Appreciation that outran most of the country. Prop 13 basis protection. A stable regulatory baseline. The current environment is harder to defend. Here’s what shows up in every underwriting conversation we have.
The capital gains stack.
A California resident selling a long-held asset is looking at federal long-term capital gains (typically 20%), net investment income tax (3.8% on most investor scenarios), plus California’s top marginal rate of 13.3% on the state portion. Effective combined can reach the high 30s. Contrast that with a seller exchanging into Texas or Florida, where the state portion goes to zero, not at sale, but for the duration of the hold on the replacement asset.
The insurance market has changed.
State Farm stopped writing new landlord policies in 2023. Allstate paused new business. Several commercial admitted carriers have followed. Small multifamily, older wood-frame construction, shopping centers, office, wildfire-exposed submarkets: the quotes owners are receiving have moved premiums from a rounding error to a real line item.
Rent control expansion.
AB 1482 statewide, plus city overlays in Los Angeles, Santa Monica, Culver City, Inglewood, Oakland, San Jose, Berkeley and others, continues to tighten what an owner can realize from a repositioned building. Even the exemptions are narrower than they were five years ago. And the tide is not heading in the right direction, nor are these places getting more affordable as a result.
Operating overhead keeps growing.
Beyond rent control, the cost of running a California building keeps stacking up. Soft-story seismic retrofits in Los Angeles and the Bay Area. SB 326 and SB 721 balcony and deck inspection regimes for multifamily. ADA accessibility lawsuits with statutory damages most other states don’t carry. City-level relocation-assistance ordinances. Each item alone is manageable. Stacked on the same stabilized asset across a ten-year hold, they show up as a real margin drag that wasn’t there a decade ago.
Concentration risk sits underneath all of this.
A portfolio where 80% of the equity is in one state, one rate regime, one insurance market, one fire season, one legislature, is a portfolio that isn’t as diversified as the owner’s real estate intuition suggests. Good assets in California still throw off good cash flow. Objective, informed owners ask whether some portion of that equity should also be throwing off cash flow in a place where the tide is flowing different directions, and the underwriting isn’t this fragile. If any of that frames your current thinking, you’re in good company. The rest of this page is written for you.
How the exchange works when you leave California.
The federal framework is short and most readers here already know it. IRC §1031 defers capital gains. 45 days to identify in writing. 180 days to close. A Qualified Intermediary holds proceeds so the exchanger never has constructive receipt. Same-taxpayer rule. What changes when the relinquished property is in California is where owners need local mechanics:
Item 1FTB Form 593 withholding
California requires a 3.33% withholding of the total sale price (or 12.3% of the gain, if elected) on transfer of California real property to a non-resident seller. For a 1031 exchange that intends to defer the gain, the owner files Form 593-C at close. Correctly executed, it takes the withholding to zero.
Item 2The California clawback
Under Cal. Rev. & Tax Code §18662, California preserves a tax claim on gain that originated from California-sourced property, even after an exchange into an out-of-state replacement. Each year, while you continue to hold the replacement, you file FTB Form 3840. When and if you eventually sell the replacement in a taxable disposition, California collects its portion of the original gain.
Three practical notes. First, most investors who exchange out of California do so expecting to hold for many years, and a clawback that triggers in twenty years, or never, has a very different present value than one that triggers in two. Second, assets held at death receive a stepped-up basis, which can extinguish the California clawback liability entirely for heirs. Third, owners who plan further exchanges over time continue deferring without triggering the clawback event.
Item 3Proposition 13 basis reset
If you exchange a long-held California property with a low Prop 13 assessed value into another California property, the replacement comes in at current market value, and your decades of property tax protection reset. The annual tax jump can easily be mid-five to six figures. That ongoing carrying cost is often larger than the FTB clawback most owners are worried about. The inverse: when you exchange into an out-of-state replacement, Prop 13 doesn’t apply either way.
Drop-and-swap exchanges, and the partnership 1031.
When two or more partners own the property together and don’t agree on what comes next, the standard 1031 mechanics break down. The drop-and-swap is the structure that gets each partner to their own redeployment.
What a drop-and-swap is. A drop-and-swap is a 1031 exchange structure used when a partnership owns the relinquished property but the partners want to redeploy into different replacement assets. The partnership distributes the property to its members as tenants-in-common, typically supported by a Section 761 election, and each former partner then runs their own 1031 into their own replacement.
When it’s needed. Most partnership 1031 conversations start the same way. The partnership has done well on a long hold. The partners are at different points in their lives. A traditional 1031 keeps everyone together in the same replacement asset, which doesn’t solve the problem. A drop-and-swap separates the partners cleanly and lets each one execute the redeployment that fits their objectives.
Why timing matters. The drop step needs to happen far enough in advance of the swap that the structure doesn’t read as a same-day workaround. ARCA’s role at the pre-listing conversation is to flag this timing constraint before the partnership commits to a sale path that closes the structuring window.
Where ARCA fits. ARCA brokers both sides of the transaction (or just the acquisition side if the disposition is already listed or in escrow), and orchestrates the timeline against the structural and tax decisions your CPA and counsel are making. We don’t draft the Section 761 election. We do make sure the broker side of the engagement isn’t the thing that breaks the structure.
A fuller walk-through of drop-and-swap mechanics, Section 761 election timing, and the questions worth asking your CPA before you list.
Drop-and-swap 1031 exchange: a California broker’s guide to partnership splits →
Where California equity is moving.
We don’t recommend markets in the abstract. The right replacement depends on debt position, hold horizon, yield priorities, age, estate plan. That said, here is what the capital flow we see actually looks like.
Strong population migration. Deep transactional liquidity across industrial, small multifamily, medical office, neighborhood retail. Cap rate spreads of 75–150 bps over comparable California product.
Population growth continues to surprise; the industrial supply pipeline from 2021–2023 is still being absorbed.
Reno in particular has industrial demand from California business relocations that hasn’t cooled.
Insurance environment is its own story, but fundamentals in specific submarkets, particularly medical and necessity-retail, have held up.
Nashville has absorbed meaningful medical and multifamily demand; Memphis logistics is attractive for industrial exchanges.
Smaller volumes but recurring destinations for owners who prioritize cash flow over headline growth.
What ARCA does, and what we don’t.
ARCA is a licensed California (and Georgia) commercial real estate brokerage. On a 1031 exchange, the scope is specific and drawn by what we’re qualified to execute.
- Disposition representation on the California property: pricing, positioning, marketing, buyer sourcing, closing coordination.
- Identification support: pulling real opportunities in your target replacement markets, underwritten against your actual numbers, within your 45-day window.
- Acquisition representation on the replacement side, directly or through our correspondent broker network in destination markets.
- Transaction orchestration: keeping the QI, CPA, attorney, escrow, title, lender, insurance broker on the same timeline.
- Post-close support: referral to property management in the replacement market.
- Not a Qualified Intermediary. A QI holds sale proceeds during the 45/180 window. Your funds never touch us. We refer to trusted QI partners.
- Not your CPA or attorney. We don’t give tax or legal advice. The opinion letter comes from them.
- Not a DST sponsor or securities dealer. DSTs can qualify as replacement property. DST offerings are securities, sold through licensed securities representatives. We refer.
The narrow version: we broker the trade.
How an ARCA-run exchange unfolds.
Start to finish, six to twelve months for a clean exchange. Reverse exchanges take longer. The drop-and-swap timeline should be set by your CPA and attorney for maximum defensibility.
Pre-listing conversation
An unhurried, confidential call. We walk through the relinquished asset’s economics, debt position, and the high-level redeployment framework. If an exchange isn’t the right answer, we’ll say so on that call, not after the engagement is signed.
Disposition preparation
Updated broker opinion of value, pricing and positioning, OM preparation, photography. We will execute co-brokerage agreements if the replacement asset is in a state where we do not hold an active brokerage license.
Go to market
Typical marketing cycle of 30–60 days. LOIs reviewed, PSA negotiated, escrow opened.
California property closes
FTB Form 593-C is executed. QI takes custody of net proceeds. The 45-day identification clock starts.
Identification
We pull underwritten candidates in your target markets, and have been doing so since your downleg went non-refundable. By the time your 45-day ID clock starts, we typically have written offers on several candidates already in motion.
Acquisition
PSA on the replacement, due diligence, financing if applicable, close by day 180.
Ongoing reporting
CPA files FTB Form 3840 the first year and each year the California clawback gain remains outstanding, until it’s ultimately recognized or can be extinguished through step-up at death.
Recent engagements, anonymized.
Dollar figures are withheld for client confidentiality. The shapes are representative of how an ARCA-run exchange actually plays out.
Large single-tenant Pasadena retail property, owned 50/50 into two independently-held NNN portfolios.
Two partners had owned a large single-tenant retail property in Pasadena for years. The asset itself was the quiet part of the conversation. The sale came from the partnership, not the asset. Both partners had reached a point where their estate plans pointed in different directions, and an undivided half-interest in one large property wasn’t the right vehicle for either of them going forward.
One of the partners’ CPAs reached out to us, and the fuse had already been lit. The ownership had received and accepted a great offer, and then the panic of what to do next started to hit. The exchange went from “maybe it will happen” to “oh my god, it’s happening.” A lot of money to spend in a short time, with no margin for mistakes. We sourced a curated set of nationally diversified sale-leaseback opportunities, long-term NNN structures with investment-grade tenants. One partner gravitated toward fewer, larger, more visible single-tenant holdings; the other preferred a wider spread.
The partnership ended. Each partner left with an individually-owned portfolio aligned to their own estate plan: one with investment-grade contractual income, the other with more local property. No remaining shared liabilities between them.
California multifamily book partially redeployed into Austin and Charleston single-tenant net lease.
A decades-long California multifamily operator. By the time the conversation started, the environment had shifted in ways the operator couldn’t ignore. AB 1482 had cut the rent-growth ceiling. Insurance had moved from a rounding error to a real underwriting input. The rate environment had repriced any refinance on the horizon. Bad news kept arriving in batches.
The ownership targeted two of the most operationally intensive assets for disposition, and held the rest of the California book. We sourced two single-tenant absolute NNN replacements in two growth markets, in two different industries: one in the Austin MSA, one in the greater Charleston area. Fifteen-year initial terms on both, with contractual rent escalators.
The repositioned equity now produces contractual, escalating income in two state-tax regimes where the state portion of a future sale’s gain stack is zero. The operational load is, on the replacement side, effectively nothing.
Multigenerational TIC asset exited into coordinated family 1031s across a diversified NNN portfolio.
A California asset held by a multigenerational family as a tenancy-in-common. The property was not on the market. Off-market interest had been trickling in for years. After a few cycles of that, one of the inbound numbers hit a level that even the holders and their fiduciaries who hadn’t been thinking about selling had to think about.
Working through their fiduciaries, and directly with several of the more active family members, we had to orchestrate a coordinated exchange across every TIC partner simultaneously. Some partners took cash and paid the tax. For those who exchanged, each party’s 1031 had different objectives. We mapped the identification and acquisition sequence across the whole group, deconflicting deal flow.
What came out the other side wasn’t a liquidity event; it was a deliberate generational restructuring. The family moved from single-asset concentration into a portfolio of passive, contractual, diversified income streams.
Stabilized value-add exit recycled into a three-asset multifamily portfolio across differentiated strategies.
An active operator who had executed a value-add business plan on a single multifamily asset and was looking at a stabilized rent roll with most of the near-term upside already harvested. A window in the rate environment opened. The operator wasn’t trying to pivot into passive income. The goal was to keep running the value-add playbook, just on a larger footprint.
We ran the disposition in parallel with an active acquisition process. The three assets that landed each played a specific role: a C-class property with strong in-place cash flow and a clear unit-turn lift; an A-location stabilized asset for long-term appreciation; a B-location asset in the path of neighborhood growth, the long-dated bet on trajectory.
Inside the 180-day acquisition window, all three assets cleared the initial underwriting. Two of the three remain in the portfolio years later and have continued to outperform.
Questions owners tend to ask.
Can I defer California state tax when I exchange into an out-of-state property?
Yes. California conforms to the federal 1031 treatment for deferral purposes. Under the California clawback rule (Rev. & Tax Code §18662), the state preserves its claim on the original California-sourced gain and will collect when you eventually sell the replacement in a taxable disposition, if that ever happens. You file FTB Form 3840 annually to report the deferred gain.
What is the California clawback?
The clawback is the mechanism by which California tracks gain originally sourced from California real property across subsequent exchanges. It becomes a real cash tax event at the final taxable disposition of the chain, which could be never, if the owner holds until death and heirs receive a stepped-up basis, or if the owner continues 1031-exchanging indefinitely.
How does Prop 13 factor into my replacement property choice?
If you exchange into another California property, the replacement resets to current market value for assessment purposes, wiping out your Prop 13 basis on the new asset. The ongoing tax uplift can exceed the federal gain savings over a long hold. Exchanging out of California sidesteps the Prop 13 reset issue entirely.
Does the Los Angeles “mansion tax” (Measure ULA) apply to commercial 1031 exchanges?
Yes. Measure ULA, the Los Angeles transfer tax that took effect April 2023, is imposed on any transfer of real property within the City of Los Angeles. The rate is 4% on transfers of $5M and above, 5.5% on transfers of $10M and above. 1031 exchange treatment defers federal capital gains; it does not affect local transfer taxes.
How should I plan for ULA when selling a commercial property in Los Angeles?
Model ULA into your disposition number as a known cost, alongside commission, escrow, and FTB withholding. ARCA’s position is straightforward: the law is the law, and our role is to execute compliant transactions. Any question about transfer-tax structuring should be evaluated by your tax counsel and a real estate attorney before any commitment to a transaction structure. ARCA does not advise on transfer-tax planning and will refer you to qualified counsel.
What if I want to sell my LLC instead of the property?
This is a fact-specific question that depends on entity structure, current tax law, and the particulars of the transaction. It is the kind of question that should be evaluated by your tax counsel and a real estate attorney, not your broker. ARCA does not advise on entity-sale structures or their tax consequences. Once your counsel has confirmed the structure, ARCA can broker a compliant 1031.
Can I split my equity across multiple replacement properties?
Yes. The Three Property Rule lets you identify up to three replacement properties regardless of value. The 200% Rule lets you identify any number as long as their combined value stays within 200% of the relinquished property’s value.
Does a Delaware Statutory Trust (DST) qualify as replacement property?
Yes. DSTs can be identified as like-kind replacement and are sometimes useful for residual equity or passive ownership. DST offerings are securities and are transacted through licensed securities representatives.
When is a 1031 exchange the wrong move?
When current basis is close to market value and the gain being deferred isn’t large enough to justify transaction friction. When the owner’s age and estate plan argue for holding through a step-up at death. When full liquidity is needed.
What if I miss the 45-day or 180-day deadline?
Missing either deadline disqualifies the transaction from 1031 treatment. The exchange collapses into a taxable sale of the relinquished property. Deadlines are calendar-day, not business-day. There is no general hardship extension.
Contact our 1031 Exchange Team Leads
Matthew Dobson
Multi-property, multi-party 1031 exchanges with hard timing constraints.
Joshua Levy
1031 replacement strategy, dropdown structures, and partnership reorganizations.
One hour, confidential, non-obligating.
If you’re six to eighteen months from a possible sale (or earlier), the first call costs you nothing but the hour. We walk the property’s economics, the likely disposition number, the California tax picture your CPA would confirm, and, if an exchange is the right next move, the redeployment shapes that fit your objectives.
Common 1031 replacement asset classes.
The four asset classes most commonly used as replacement property in California 1031 exchanges, in order of frequency.
Apartment building and multifamily sales across Los Angeles, from 5-unit value-add to institutional-scale.
Shopping center, single-tenant NNN, and retail property sales.
Office and creative office building sales across LA submarkets.
Industrial warehouses and flex space sales across Greater Los Angeles.
