1031 Exchange California: State Tax, Withholding and Clawback

Key takeaways

• California follows the federal 1031 exchange rules for real property. For tax years starting on or after January 1, 2025, California also limits exchanges to real property, the same as federal law.
• California has no lower rate for capital gains. The whole gain is taxed as ordinary income, at up to 12.3% on the 2025 rate schedules plus a 1% tax on taxable income over $1 million.
• Escrow generally withholds 3⅓% of the sale price on a California property sale. A seller in a 1031 exchange can claim an exemption on Form 593, but the qualified intermediary must withhold if you take cash out or the exchange fails.
• Swap a California property for one outside the state, and Form FTB 3840 becomes a yearly filing until the deferred gain is taxed. That's the California "clawback," and it applies whether you live in California or not.
• A Delaware Statutory Trust (DST) interest can qualify as replacement property for a California seller. If the DST owns property outside California, the FTB 3840 filing comes with it.
• A 1031 exchange defers tax; it doesn't erase it. California keeps its claim on the California part of the gain even after you move away.

How does a 1031 exchange work in California?

Start with the federal piece. 26 U.S.C. §1031 says that when you trade investment or business real estate for more of the same, you don't recognize the gain at the time of the trade. That's what a 1031 exchange is. The bill is postponed until a later taxable sale. Postponed is the key word: the gain is deferred, not forgiven.

California builds its income tax on top of the federal one. So when an exchange works for federal purposes, it generally works for California too. You don't apply for a separate state exchange. You meet the federal rules, and California follows.

The federal requirements fit in one paragraph. Both sides of the trade must be like-kind real property, meaning real estate held for investment or business use. Before closing, you hire a qualified intermediary (QI): a third party that receives the sale proceeds in your place, because cash in your own account ends the exchange. Within 45 days of the sale, you list possible replacements in a signed writing. The purchase must close within 180 days or your tax return due date (with extensions) for the year of the sale, whichever comes first. Full deferral generally means spending all the QI-held cash on property priced at or above what you sold. Each of these points gets its own section in my federal 1031 exchange rules guide.

Everything below is what California adds.

The four California pieces

California layers four things onto a federal exchange:

1. A high state tax on the gain, which is what makes deferral worth so much here.
2. Withholding at closing, handled on Form 593.
3. An annual filing, Form FTB 3840, if your replacement property is outside California.
4. Source rules that let California tax its share of the gain later, even if you've moved.

Each of those has its own section below. If you're weighing California against other places to buy, my hub page on 1031 exchange rules by state lines the states up against each other.

Does California follow the federal 1031 rules?

Yes, for real property. The Franchise Tax Board (FTB) is California's income tax agency. Its 2025 instructions for Form FTB 3840 say: "For taxable years beginning on or after January 1, 2025, like-kind exchanges are limited to real property."

That lines California up with the federal rule. The 2017 federal tax law limited Section 1031 to real property. California took longer to follow fully. The same FTB instructions explain that some exchanges of personal property were still allowed for taxpayers below certain income limits if they began after January 10, 2019, and finished before January 1, 2025. That window is now closed.

For a typical investor selling a rental house, an apartment building or a commercial property, none of this changes much. Real estate for real estate has always been the core of a 1031 exchange, and it still is in both systems.

What California doesn't change

The 45-day and 180-day clocks are federal, and California runs on the same ones with no state-specific dates. California doesn't require its own state exchange form when the replacement property is also in California. It doesn't have its own definition of like-kind for real estate.

What it does have is the money side: rates, withholding and tracking. That's where the rest of this guide goes.

How much California tax does a 1031 exchange defer?

The FTB's page on capital gains and losses puts it plainly: "California does not have a lower rate for capital gains. All capital gains are taxed as ordinary income."

That's the single biggest reason a 1031 exchange matters more in California than in most states. Federal law gives long-term gains lower rates. California doesn't.

The rate brackets

California has not published its 2026 rate schedules as of this writing. The FTB's 2026 estimated tax instructions tell people to use the 2025 tax table for their estimates. So the numbers below are for tax year 2025.

On the FTB's 2025 California tax rate schedules, the top 12.3% bracket starts at:

Below those amounts, the rates step down through 11.3%, 10.3%, 9.3% and lower brackets.

The extra 1% over $1 million

California adds the Behavioral Health Services Tax, which was formerly called the Mental Health Services Tax. The 2026 Form 540-ES instructions tell taxpayers with taxable income over $1,000,000 to complete a worksheet that takes income above $1,000,000 and multiplies it by 1%.

So the top combined rate on a large gain is 12.3% plus 1%, or 13.3%. A big real estate sale can push a household into that range in the year of the sale, even if its normal income is much lower.

How the federal tax stacks on top

Federal tax on a real estate gain usually has three layers:

• Unrecaptured Section 1250 gain, which is the part of the gain that comes from depreciation you took on a building. Under 26 U.S.C. §1(h), it's taxed at a maximum of 25%. My guide to depreciation recapture explains it in depth.
• Long-term capital gain on the rest, at 0%, 15% or 20%. For 2026, IRS Revenue Procedure 2025-32 ends the 15% bracket at $613,700 of taxable income on a joint return, or $545,500 on a single return. Income past those points is taxed at 20%.
• The net investment income tax (NIIT), a 3.8% federal tax on investment income. 26 U.S.C. §1411 charges it on whichever is smaller: your net investment income, or the amount by which your modified income tops $250,000 (married filing jointly) or $200,000 (most single filers).

California adds its own tax on top of all three. It doesn't care which federal layer a dollar falls in. Every dollar of gain is ordinary income to California.

Worked example: a Los Angeles rental, sold two ways

Everything in this example is hypothetical. The couple, the building and the figures are invented and rounded to keep the math easy. Treat it as an illustration, not tax advice, and have your CPA work from your own numbers.

The starting point

Say a married couple living in California bought a small Los Angeles rental building years ago. Here are their numbers for a 2026 sale:

• Sale price: $2,000,000
• Selling costs: $100,000
• Original price: $1,000,000
• Depreciation taken over the years: $400,000
• Adjusted basis (original price minus depreciation): $600,000
• Loan payoff at closing: $500,000

Basis means the amount the tax system treats as your investment in the property. Depreciation deductions shrink it year by year.

Their gain is $2,000,000 − $100,000 − $600,000 = $1,300,000.

Option 1: a taxable sale

Assume their other income already puts them in the top federal brackets for 2026.

The California line is an upper bound. In real life, part of the gain climbs through lower brackets first, so the actual state figure would be somewhat lower. The point stands: in this hypothetical, California alone could take well over $150,000.

Their cash after the sale would be $2,000,000 − $100,000 − $500,000 = $1,400,000 before tax. After a tax bill near $500,000, they'd have roughly $900,000 left to reinvest.

Option 2: a full 1031 exchange

Now say they use a QI and complete an exchange. To defer all the gain, they generally need to:

• Buy replacement property worth at least $1,900,000 (the sale price minus selling costs), and
• Reinvest all $1,400,000 of cash held by the QI.

If they do, the federal and California tax is deferred. Their full $1,400,000 goes to work instead of about $900,000. Their basis in the new property starts from the old $600,000, adjusted for any extra debt or cash added. The deferred $1,300,000 gain rides along.

Option 3: a partial exchange

Say they keep $100,000 in cash and reinvest only $1,300,000. Tax people call that $100,000 boot: value you walk away with that isn't like-kind real estate. The federal tax applies to boot, up to the size of your total gain. My guide to partial exchanges and boot covers the federal side.

On the California side, two things happen. The $100,000 is taxed as ordinary income on their state return. And because it's over $1,500, the QI generally has to withhold state tax on it at closing. I walk through that math in the withholding section below.

What the example shows

The California part of the bill is often what tips the decision. A couple in a state with no income tax would defer "only" the federal amount. A California couple defers both. The larger the gain, the wider that gap gets.

How does California withholding work on a 1031 exchange?

California collects some of its tax at closing, before you ever file a return. This is called real estate withholding. The escrow company takes money out of the seller's proceeds and sends it to the FTB.

The default rule

According to the FTB's 2026 instructions for Form 593, the standard withholding is 3⅓% of the selling price. The form uses the factor 0.0333.

On a $2,000,000 sale, that's about $66,600 held back. In a regular sale, the seller gets credit for it on the state return. In an exchange, that cash would be gone from the QI account just when you need every dollar for the purchase.

The 1031 exemption at closing

Form 593 has a place where the seller certifies that the sale is part of a like-kind exchange. When that certification applies, the sale is exempt from withholding at the time of the first transfer. Your escrow officer will ask you to complete the form before closing.

A few other exemptions on the same form can also apply. One is a sale price of $100,000 or less. Another is a sale of your main home that meets the two-out-of-five-year rule. For an investment property exchange, the like-kind certification is the one that usually matters.

When the QI has to withhold

The exemption covers the exchange part. It doesn't cover cash you take out or a deal that falls apart. The FTB's page for qualified intermediaries lists two triggers:

• Boot over $1,500. The QI must "Withhold 3 1/3% (0.0333) of the boot in excess of $1,500."
• A failed exchange. The QI must withhold "if the exchange fails, does not occur, or does not meet the IRC section 1031 requirements," at 3⅓% of the total sales price.

The same page says a QI that fails to withhold can owe a penalty of the greater of $500 or 10% of the required withholding. That's one reason a QI will ask you about cash in or out early.

Here's how that looks in numbers, using the hypothetical $2,000,000 sale:

The alternative calculation

Withholding of 3⅓% of the price can be far more or far less than the tax you'll actually owe. Form 593 lets a seller elect an alternative: withholding based on estimated gain times a set rate. For individuals, the 2026 instructions list a rate of 12.3%. Trusts use the same 12.3% rate. Corporations, banks and S corporations have their own rates on the form.

This option mostly matters in a failed exchange or a sale with a lot of boot. Your escrow officer and CPA can tell you which method fits.

Timing

The 2026 Form 593 instructions say withholding is sent to the FTB by the 20th day of the month after the month escrow closes. Think of the withheld money as a down payment on your state tax. The true amount gets settled when you file your California return for that year.

What is the California clawback?

The clawback is shorthand for how California follows deferred gain out of the state after a California property is swapped for one elsewhere. California doesn't give up its right to tax that gain just because the new property sits somewhere else.

Who has to file Form FTB 3840

The FTB 3840 instructions say the form is required for "All taxpayers who conduct an IRC Section 1031 exchange, regardless of residence status or commercial domicile," when they exchange California real property for like-kind property outside California.

Three details are worth knowing:

• Residence doesn't matter. A Californian and an Arizonan who each trade California property for out-of-state property both file.
• Disregarded entities don't file on their own. If you own through a single-member LLC that's ignored for tax purposes, the instructions say the owner files.
• California-to-California exchanges don't need it. The form is for exchanges where the replacement property is outside the state.

How long you keep filing

The instructions say the form "must be filed for the taxable year of the exchange and for each subsequent taxable year," generally until the gain is recognized. In plain words, you file every year for as long as you hold the out-of-state property, or anything you exchanged it into.

If you do a second exchange out of state, the California gain carries into the next property. The filing keeps going.

What happens if you don't file

The instructions are direct about this. If you don't file, "the FTB may estimate net income and assess tax plus any applicable penalties and interest." For someone with no California return at all, the FTB may issue a Notice of Proposed Assessment for the California-sourced deferred gain.

That's a real risk for people who move away and stop thinking about California. The deferred gain doesn't leave with you.

What the form actually does

The form reports the exchange and allocates the "California sourced deferred gain or loss to the property received in the exchange." Think of it as a running tag on your replacement property. Each year it reminds the FTB that part of your future gain belongs to California.

How does California tax the gain after you move away?

This is where the clawback has teeth. The FTB's Publication 1100 covers people who change residency. Its section on deferred gains says: "A gain or loss from the sale or exchange of real or tangible personal property located in California is sourced to California at the time the gain or loss is realized."

Source is the tax idea of where income comes from. California taxes nonresidents on income from California sources. So gain realized on California property keeps a California source, even if you pay the tax years later while living in another state.

The "lesser of" rule

Publication 1100 includes an example of a Texas resident who exchanged a California condo for Texas property and deferred a $15,000 gain. Later, the Texas property was sold for a $20,000 gain in a taxable sale. California taxed $15,000, which is the lesser of the deferred gain or the gain recognized on the later sale.

That gives you a simple way to think about it. California's share is capped at the gain you deferred when you left. It can be smaller if the later sale produces less gain.

A hypothetical with bigger numbers

This is a hypothetical example only.

Say you exchange a San Diego building and defer $1,300,000 of California gain. You buy property in another state and move there. You file FTB 3840 every year. Twelve years later, you sell for cash.

You'd report the California-source part on a California nonresident return, Form 540NR. Your new state may also tax the gain under its own rules. Ask your CPA whether your new state gives a credit for tax paid to California, and how the two returns fit together.

What about moving into California?

The rule runs the other way, too. Publication 1100 includes an example of a person who exchanged Kansas property for California property, then became a California resident and sold. California taxed the whole gain on the sale "because you were a California resident at the time of the sale." The publication says the person may claim a credit for Kansas tax paid on the part deferred in Kansas.

So if you're moving to California with a deferred gain from another state, that gain can become California's to tax too.

For the case of a Nevada resident trading Nevada property for California property, see my guide to 1031 exchanges in Nevada. The source math works differently when you never become a California resident.

Selling in California and buying in another state

This is the most common out-of-state pattern for California sellers. Here's what changes compared with a California-to-California exchange.

At closing

Form 593 still applies to the California sale. You certify the exchange, and withholding generally doesn't happen unless there's boot over $1,500 or the exchange fails. The out-of-state purchase has its own closing, with its own state's transfer taxes and forms. Your escrow officer in the other state handles those.

Every year after

You file Form FTB 3840 each year. If you're a California resident, you're filing a California return anyway, and the form goes with it. If you've moved, you still file it.

On your rental income

If you stay a California resident, California taxes your rental income from the new property. Publication 1100 says, "California taxes residents on all income regardless of source." The new state may tax that income too, as a nonresident. California generally allows a credit for tax paid to another state on the same income, under its own rules, so ask your CPA whether California's credit applies to that state.

When you finally sell for cash

The California-source deferred gain is taxed by California. Any gain built up after the exchange is taxed by whichever state has the right under its rules, based on where you live and where the property is.

Buying California property in a 1031 exchange

Some people sell elsewhere and buy in California, or they sell in California and buy in California. A few California-specific costs come with the purchase.

Property tax reassessment

California property tax works under Proposition 13. The state Board of Equalization's change in ownership FAQ says that when a change in ownership happens, "Proposition 13 requires the county assessor to reassess the property to its current fair market value."

A 1031 exchange is a federal and state income tax rule. Buying replacement property is generally still a purchase in the eyes of the county assessor. If your old property had a low assessed value from years ago, your new one will likely start at today's value. Budget for a higher property tax bill. If you think an exclusion might apply, ask your county assessor or an attorney before closing.

The same FAQ says a Preliminary Change of Ownership Report is usually filed with the deed when it's recorded. Escrow normally handles it.

Documentary transfer tax

Counties in California can charge a documentary transfer tax when a deed records. Under Revenue and Taxation Code §11911, the county rate is $0.55 for each $500 of value, figured "exclusive of the value of any lien or encumbrance remaining thereon at the time of sale."

A 1031 exchange doesn't defer transfer taxes. They're a cost of closing, not an income tax. Ask your escrow officer who pays them in your county and city, since local custom varies.

Your QI and California law

Your QI holds every dollar of your sale proceeds, so choose carefully. My guide to choosing a qualified intermediary covers the state rules that apply to exchange companies, including California's, and what to ask a QI before you sign.

Can a DST be California replacement property?

Picture a large apartment complex, warehouse or net-leased building held inside a trust, with ownership split among many investors. That's a Delaware Statutory Trust (DST). In IRS Revenue Ruling 2004-86, the IRS concluded that "A taxpayer may exchange real property for an interest in the Delaware statutory trust" if the rest of Section 1031 is satisfied. For a California seller, that means a DST interest can qualify as the replacement.

My DST guide covers how they work in general. Here are the California-specific points.

Out-of-state DST property means FTB 3840

A DST may own property anywhere in the country. If you exchange California property into a DST that holds out-of-state property, that's an exchange of California property for out-of-state property. The FTB 3840 filing applies, every year, until the gain is recognized.

If a DST owns property in California, that portion stays in-state. A DST that owns property in several states may need its allocations sorted out for the form. Ask the sponsor for the property locations and talk with your CPA about how to complete the form.

Your rental income and state returns

As a California resident, you report your share of the DST's rental income to California, wherever the property is. You may also have to file nonresident returns in states where the trust owns property, if those states have an income tax. Ask the sponsor which states its properties are in before you invest, so your CPA can plan for the filings.

When the DST sells

A DST eventually sells its property. At that point, you have a choice. You can take cash, which generally triggers the deferred federal and California tax. Or you can do another 1031 exchange into new property, which keeps the deferral going. If you exchange again into out-of-state property, the FTB 3840 filing continues.

Who can invest

Because DST interests are securities, sponsors generally limit them to accredited investors. The SEC's accredited investor bulletin describes three common ways an individual qualifies. Income: above $200,000 in each of the last two years (or $300,000 jointly with a spouse or spousal equivalent), with a reasonable expectation of the same this year. Net worth: above $1 million, excluding your primary residence. Credentials: a Series 7, 65 or 82 license in good standing.

The trade-offs

None of this is low-risk. Distributions are not guaranteed, and part or all of your money can be lost. The sponsor makes every property decision, and there's generally no way out until the trust sells. In the SEC's words, from its Regulation D private placement bulletin, "you should be prepared to hold the securities indefinitely." Fees come out of returns. The offering's private placement memorandum (PPM) is the disclosure document covering the property, the costs and the risk factors, and it deserves a full read.

DST vs. buying another property: a California comparison

Here's how the two common paths compare for a California seller. Neither is right for everyone.

The last two rows matter for California sellers on a tight timeline. Because the trust already owns its buildings, a purchase with complete paperwork, funding and approvals can often close in two to three business days. That speed is only usable if the DST appeared on your signed 45-day list.

How to do a 1031 exchange in California, step by step

Here's the order I'd follow for a California sale. Your CPA, attorney and QI should confirm each step for your situation.

Step 1: Run the California numbers early

Before you list the property, ask your CPA to estimate the federal and California tax on a taxable sale. Use your real basis, depreciation and income. You need that number to decide whether an exchange is worth the effort, and how much cash you can afford to take out.

Step 2: Choose a QI and sign before closing

Pick a qualified intermediary and sign the exchange agreement before the sale closes. If the money hits your account first, the exchange is over.

Step 3: Write the exchange into the purchase agreement

Ask for a cooperation clause in which the buyer agrees to sign the assignment and notices your QI needs. It costs the buyer nothing.

Step 4: Complete Form 593 with escrow

Give escrow your completed Form 593 before closing. Certify the like-kind exchange so the default 3⅓% isn't taken out. Confirm with escrow and the QI that the proceeds will go straight to the QI.

Step 5: Close and start the clocks

The day your sale closes starts both deadlines. Use a calendar, or my 1031 exchange deadline calculator, to mark day 45 and the final closing date. Remember the final date is 180 days or your tax return due date (with extensions) for the year of the sale, whichever comes first.

Step 6: Get your signed list to the QI

Your identification is due by midnight on day 45. Put a backup or two on it. A backup can't be added later; it only counts if it was identified in writing within 45 days.

Step 7: Weigh California against other states

If you're buying outside California, plan for FTB 3840 every year. If you're buying in California, plan for property tax reassessment and transfer taxes.

Step 8: Close on replacement property

Close by the deadline. Reinvest all the cash and buy at least as much value as you sold, if you want to defer all the tax. Any cash you keep is boot, and the QI will withhold on boot over $1,500.

Step 9: File the returns

The IRS wants Form 8824 attached to the federal return covering the sale. File your California return, and add Form FTB 3840 if the replacement property is out of state.

Step 10: Keep filing FTB 3840

Put a note in your tax file. Every year after an out-of-state exchange, the form goes back in. Tell your CPA again if you move, change CPAs or exchange a second time.

Mistakes to avoid in a California exchange

1. Forgetting Form 593. Without the exchange certification, escrow may withhold 3⅓% of the price. Getting that money back takes a tax return.
2. Taking "a little" cash at closing. Anything over $1,500 triggers QI withholding, and all of it is taxable boot.
3. Dropping FTB 3840 after year one. It's an every-year filing. Missing it can lead the FTB to estimate your income and assess tax.
4. Assuming a move ends California's claim. It doesn't. The California-source deferred gain stays California's to tax when you sell.
5. Missing the return-due-date trap. For a sale late in the year, your tax return due date can come before day 180. File an extension if you're still in the exchange.
6. Underbudgeting the replacement property's taxes. A California purchase is generally reassessed at today's value, and transfer taxes are due at recording.
7. Treating a DST as simpler on taxes. It may add nonresident returns in other states and the annual FTB 3840 filing.
8. Changing who owns the property right before the sale. The same taxpayer who sells generally has to buy. Restructuring an LLC or partnership just before a sale can create problems. Plan any changes with your attorney well ahead.
9. Ignoring depreciation on the California side. California taxes the whole gain as ordinary income, including the depreciation part.
10. Waiting until escrow opens to call a CPA. The time to plan is before you list.

Who I am and how I can help

My firm, Baker 1031 Investments, has its headquarters on Montgomery Street in San Francisco; you can read more about my background. Securities are offered through Aurora Securities, Inc., member FINRA/SIPC.

If a DST could fit your California exchange, we can go through my current DST offerings together, and I'll explain what appeals to me about each and what gives me pause. I don't give tax or legal advice. Your CPA and attorney handle the California filings and the tax planning.

What my data shows

Everything in this section comes from my offering records as of October 2026, a set of 76 DST offerings from 38 sponsors. It's a snapshot of what I've tracked, with no prediction attached. The detail is on my DST offering data page.

Where DST properties are located

The number that matters most for a California seller is location: locations span 33 states; the most common are Florida (14), Texas (13), North Carolina (8), Georgia (7).

For a California seller, that means a DST exchange will often be an out-of-state exchange. Plan for Form FTB 3840 from the start, and ask the sponsor where each property sits before you identify it.

Other numbers worth knowing

Loan-to-value (LTV) expresses a property's debt as a percentage of its value. Leverage matters in an exchange because you generally need to replace the debt you paid off, either with new debt or with extra cash.

Lower minimums can help a California seller who has a small amount of cash left near the end of an exchange. Rather than taking that cash as boot, with QI withholding and ordinary-income tax, a small DST investment may keep it inside the exchange. Only 16 offerings were open at that point in my records, so availability changes and nothing is certain until you close.

Frequently asked questions

Does California recognize 1031 exchanges?

Yes. California follows the federal Section 1031 rules for real property, so an exchange that defers federal tax generally defers California tax as well. For tax years starting on or after January 1, 2025, California also limits exchanges to real property.

How much is California tax on a real estate gain?

California taxes the whole gain as ordinary income, with no lower capital gains rate. On the 2025 rate schedules, the top bracket is 12.3%, and a 1% tax applies to taxable income over $1 million, for a top rate of 13.3%. The 2026 schedules hadn't been published at the time of writing.

Do I have to pay California withholding on a 1031 exchange?

Usually not at the first closing, if you certify the exchange on Form 593. The QI must withhold 3⅓% of any boot over $1,500, and 3⅓% of the full sale price if the exchange fails.

What is Form FTB 3840?

It's California's form for reporting an exchange of California real property for property in another state. You file it in the year of the exchange and every year after, until the deferred gain is recognized. It applies to residents and nonresidents alike.

Can I avoid the California clawback by moving to another state?

No. California treats gain realized on California property as California-source income, even if you pay it years later. When you finally sell in a taxable sale, California can tax the deferred California gain on a nonresident return.

Can I exchange California property for property in Texas or Florida?

Yes. Section 1031 lets you exchange US real estate for US real estate in any state. You'll file Form FTB 3840 every year, and California keeps its claim on the gain you deferred.

Do I need to file FTB 3840 if I buy a DST?

You do if the trust owns property outside California, which is common. If you're unsure where a DST's properties are, ask the sponsor before you identify it, and have your CPA confirm how to report it.

Will my property taxes go up if I buy replacement property in California?

Probably, if your old property had a low assessed value. California's Board of Equalization says a change in ownership generally leads the county assessor to reassess the property to current fair market value. Ask your county assessor if you think an exclusion applies.

How long do I have to complete a 1031 exchange in California?

The same as anywhere in the US: 45 days to identify replacement property in writing, and 180 days or your tax return due date (with extensions) for the year of the sale, whichever comes first, to close. California doesn't add or extend these deadlines.

What happens if my California exchange fails?

The sale becomes taxable for federal and California purposes in the year it's recognized. Your QI must withhold 3⅓% of the total sale price for California, unless you elect the alternative gain-based calculation on Form 593.

Do I owe California tax on rental income from a DST in another state?

If you're a California resident, generally yes, because California taxes residents on all income regardless of source. You may also owe tax in the state where the property is, and California generally allows a credit for tax paid to another state under its rules.

Before you act

California's rules change, and your facts are your own. Use this page to prepare good questions, not as tax, legal or investment advice; my firm doesn't provide tax, legal or accounting services. Run each decision past your CPA, your attorney and your QI before the sale closes. DST interests are sold by PPM, usually only to accredited investors; they're hard to exit, can lose all of their value, and pay distributions that are not guaranteed.

Sources

• 26 U.S.C. § 1031, Exchange of real property held for productive use or investment (Cornell LII)
• 26 U.S.C. § 1, Tax imposed, including §1(h) capital gains rates (Cornell LII)
• 26 U.S.C. § 1411, Net investment income tax (Cornell LII)
• IRS, Revenue Procedure 2025-32 (2026 inflation adjustments)
• IRS, Revenue Ruling 2004-86
• IRS, About Form 8824, Like-Kind Exchanges
• California FTB, Capital gains and losses
• California FTB, 2025 California Tax Rate Schedules
• California FTB, 2026 Form 540-ES Instructions
• California FTB, 2026 Instructions for Form 593, Real Estate Withholding Statement
• California FTB, Qualified intermediary withholding
• California FTB, 2025 Instructions for Form FTB 3840, California Like-Kind Exchanges
• California FTB, 2025 Publication 1100, Taxation of Nonresidents and Individuals Who Change Residency
• California State Board of Equalization, Change in Ownership FAQs
• California Revenue and Taxation Code § 11911 (Justia)
• Investor.gov, Updated Investor Bulletin: Accredited Investors
• Investor.gov, Private Placements under Regulation D