The plan sounds simple: sell the San Jose rental, 1031 the proceeds into Texas property, leave the 13.3% California tax bracket behind. But the fine print is where California lives.
Planning the move? Call (214) 203-9192. Johnny Borrelli, Investment Adviser Representative — there’s no charge for a first conversation.
The federal 1031 mechanics don’t change when you cross state lines. Before closing, a qualified intermediary holds your proceeds. Within 45 calendar days you identify replacement property in writing. Within 180 days you close. Touch the cash and the exchange fails; miss midnight of day 45 on the identification and it fails silently until tax season. Texas or California, the statute is the statute. (The 45-day identification rule, explained.)
Here’s what the “escape California taxes” pitch leaves out. When you exchange California-source property for out-of-state replacement property, the Franchise Tax Board generally requires Form 3840 every year until the deferred gain is recognized. Move to Frisco, get a Texas driver’s license, register to vote in Collin County — the deferred gain is still California-source, and the filing obligation follows the gain, not you.
Skip the filings and California can treat the gain as recognized — tax due, plus penalties and interest. The full breakdown is on our Form 3840 page. Read it before you assume the move settled everything.
Run the honest comparison. On the California side: up to 13.3% state tax on the gain (deferred, not erased, and still tethered), plus federal capital gains at 15% or 20%, the 3.8% net investment income tax for higher earners, and depreciation recapture (unrecaptured Section 1250 gain, taxed at a maximum 25% federal rate) — the line owners most underestimate. On the Texas side going forward: no state income tax on anything new, but property taxes that often run 2% or more of assessed value, plus insurance and management on the replacement property.
The exchange defers the federal bill and parks the California bill under the annual filing regime. It does not make either disappear.
Estimate your exposure with the capital gains tax calculator. Already settled in North Texas? See Frisco or Wylie.
Before you list the California property: your gain, your debt, your recapture exposure, your filing history, and your timeline. The California tether changes which replacement makes sense, and the 45-day clock doesn’t pause while you figure it out afterward.
Call Johnny Borrelli, Investment Adviser Representative: +1 (214) 203-9192. Texas-based — call to talk through your California-to-Texas exchange before the 45-day clock starts.
The federal rules don’t change at the state line: within 45 days of selling your California property, you must identify potential Texas replacement properties in writing to your qualified intermediary, under the standard 3-property or 200% rules. What changes is your diligence — you’re evaluating Texas markets, property taxes, insurance, and management from a distance, on a statutory clock. Line up your Texas targets before you close the California sale, not after.
Yes. Under the 3-property rule you can identify up to three replacement properties of any value, and a DST offering counts as one. Many exchangers name a direct Texas purchase first and one or two DSTs as fallbacks. DSTs are illiquid, carry sponsor risk and fee loads, and are generally limited to accredited investors.
It can be, as one option among several. A DST interest can close in days, which helps inside the 45-day identification window, and it removes the landlord headaches. But DSTs are illiquid, carry sponsor risk and fee loads, and are generally limited to accredited investors. The California filing obligations apply regardless of which replacement property you choose. Disclosure: Johnny Borrelli is a Registered Representative of Crescent Securities Group and may receive compensation — including selling commissions — if you invest in a securities product through him. Ask for his Form CRS for details on how he is compensated.
This page is for educational purposes only and does not constitute tax, legal, or investment advice. Interstate exchange issues are fact-specific; consult your CPA and tax attorney. Johnny Borrelli is a Registered Representative of Crescent Securities Group, member FINRA/SIPC, and an Investment Adviser Representative of Crescent Advisor Group, an SEC-registered investment adviser. CRD #6788697.
Your gain, your debt, your recapture, your filing history — mapped before the 45-day clock starts.
(214) 203-9192