1031 allows investors in business properties to defer taxes on the profits of properties that are sold when they are sold to raise cash to purchase other business properties.
...aka the "Starker Loophole" because the sale and purchase do not need to be simultaneous to qualify for the tax deferral.
The Section 1031 benefit is not available to sellers or buyers of personal homes.

Here's how a 1031 exchange works in CA:

Key Requirements and Process:

The properties exchanged must be "like-kind" and used for business or investment purposes.
A qualified intermediary (QI) is necessary to hold the sale proceeds and facilitate the exchange.
There is a 45-day window after selling to identify replacement properties.
The exchange must be completed within 180 days of the sale.
The replacement property must be of equal or greater value than the relinquished property.
The debt on the replacement property should be equal to or greater than the debt on the relinquished property.
- Like-Kind property is a very broad term which means that both the original and replacement properties must be of the same character or nature, even if they differ in quality.
  - In other words, you cannot exchange farming equipment for an apartment building because they are not the same asset. In terms of real estate, you can exchange almost any type of property, as long as it is not personal property.

California-Specific Rules:

CA has a "clawback" rule, meaning if you exchange a California property for one in another state, the state still tracks the deferred gain and requires filing Form FTB 3840 annually until the replacement property is sold, even if you are no longer a resident. The tax is collected when the new property is eventually sold.
CA does not follow federal depreciation recapture rules and requires recapture of claimed depreciation as income on the state tax return.

Benefits of a 1031 Exchange:

Deferral of capital gains taxes, which can be substantial in California.
Ability to reinvest the full sale proceeds.
Potential for increased cash flow from rental income.

Important Considerations:

Strict adherence to the 45-day identification and 180-day exchange deadlines is critical.
Selecting a reputable QI is important for a compliant exchange.
Seeking advice from a tax advisor or real estate attorney is highly recommended to ensure compliance and determine if a 1031 exchange is suitable.

Examples of 1031 Exchange Strategies in California:

Upgrading properties by selling a smaller one and acquiring a larger one.
Diversifying a portfolio by exchanging a commercial property for multiple smaller ones.

Note: 1031 exchanges are a complex tax deferral strategy with specific rules and limitations. Professional advice is essential for compliance and maximizing benefits.

How To Do A 1031 Exchange:

Traditionally, a 1031 exchange is where one property is literally swapped for another property of like-kind. However, the likelihood that the property you want is owned by someone who wants your property is really, really unlikely. This is why the vast majority of 1031 exchanges are delayed exchanges, also known as three-party exchanges. In a delayed exchange, you need a middleman known as a Qualified Intermediary who holds onto the cash from the “sale” of your property and uses it to “buy” the replacement property for you.

In order to do a 1031 exchange successfully, it’s essential that you follow the following rules to a tee. If you fail to comply, you could be on the hook to pay capital gains tax, and nobody wants that.

The 7 primary 1031 Exchange Rules:

Deferral of Taxes: When you sell a business or investment property that has appreciated in value, you would normally have to pay capital gains tax on the profit. A 1031 exchange allows you to postpone paying this tax by reinvesting the proceeds into a "like-kind" property.
Qualified Intermediary (QI): In a delayed 1031 exchange (the most common type), you must use a qualified intermediary to hold the proceeds from the sale of your relinquished property. The QI ensures the transaction is compliant with IRS rules and helps facilitate the exchange. You cannot receive the cash yourself or the exchange will be disqualified.
Strict Timelines: There are strict timelines that must be followed:
- 45-Day Rule: You have 45 days from the date you sell your relinquished property to identify potential replacement properties in writing.
- 180-Day Rule: You must complete the purchase of the replacement property no later than 180 days after the sale of the relinquished property, or the due date (including extensions) of your income tax return for the year of the sale, whichever is earlier.

Rule 1: Like-Kind Property

Like-Kind Property: The term "like-kind" refers to properties of the same nature, character, or class. Generally, most real estate used for business or investment purposes qualifies as like-kind to other real estate. For example, you could exchange an apartment building for raw land, or a commercial property for a warehouse, as long as both are held for investment or business use and are within the U.S.

Would be allowed examples:

Exchanging an apartment building for a duplex or raw land;
Exchanging a single-family rental property for a commercial office building;
Exchanging a rental property or vacation rental for a restaurant space;
Exchanging a commercial property for a warehouse, as long as both are held for investment or business use and are w/in the U.S.

Rule 2: Investment Or Business Property Only

A 1031 exchange is only applicable for investment or business property, not personal property.

In other words, you cannot swap one primary residence for another.

For example:

If you moved from CA to Georgia, you could not exchange your primary residence in CA for another primary residence in Georgia.
If you were to get married and move into the home of your partner, you could not exchange your current primary residence for a vacation property.

Rule 3: Greater Or Equal Value

To avoid paying taxes upon the sale of property, the IRS requires the net market value and equity of the property purchased be the same as, or greater than, the property sold to be able to defer 100% of the tax.

For example: you have a property worth $2,000,000 and a mortgage of $500,000:

For full benefit of the 1031 exchange, the new property (or properties) you purchase need(s) to have a net worth of at least 2 million dollars, and you will have to carry over at least a $500,000 mortgage.

Note: the $2,000,000+ value, and $500,000 mortgage can go towards one apartment building or three different properties with a total value of $2,000,000+.

FYI: Acquisition costs, such as inspections and broker fees, also apply toward the total cost of the new property.

Rule 4: Must Not Receive “Boot”

A Taxpayer Must Not Receive “Boot” in order for the exchange to be completely tax-free. Any boot received is taxable to the extent of the gain realized on the exchange. In other words, you can carry out a partial 1031 exchange, in which the new property is of lesser value, but this will not be 100% tax-free. The difference is called “Boot,” which is the amount you will have to pay capital gains taxes on. This option is completely okay and often used when a seller wants to make some cash and is willing to pay some taxes to do so.

For example: if your original property is sold for $2,000,000 and the property you wish to exchange under section 1031 is worth $1,500,000, you would need to pay capital gains tax on the $500,000 “boot.”

Rule 5: Same Tax Payer

The tax return and name appearing on the title of the property being sold must be the same as the tax return and titleholder that purchases the new property.

exception: occurs in the case of a single-member limited liability company (“smllc”), which is considered a pass-through to the member; therefore, the smllc may sell the original property and that sole member may purchase the new property in their individual name.
- For example: the single member of “Joe Colt LLC” is Joe Colt. Here, the LLC can sell the property owned by the LLC, and because Joe Colt is the sole member of the LLC, he can purchase property in his name and be in compliance with the 1031 code.

Rule 6: 45-Day Identification Window

The property owner has 45 calendar days, post-closing of the first property, to identify up to three potential properties of like-kind.

exception: the 200% rule
- you can identify four or more properties as long as the value of those four combined does not exceed 200% of the value of the property sold.

Rule 7: 180-Day Purchase Window

It is necessary the replacement property is received and the exchange completed no later than 180 days after the sale of the exchanged property OR the due date of the income tax return (with extensions) for the tax year in which the relinquished property was sold, whichever is earlier.

... you cannot use a 1031 exchange to sell your primary residence and buy another personal residence in CA ... or anywhere else in the United States...

...here is why:

1031 exchanges are for investment properties: The fundamental principle of a 1031 exchange, as outlined in IRS Section 1031 of the Internal Revenue Code, is that it allows investors to defer capital gains taxes when they exchange one investment property for another.
Primary residences are not considered investment properties: Your primary residence is used for personal enjoyment, not for generating income or appreciating as an investment in the same way as a rental property or commercial building.

There is a separate tax exemption for selling your primary residence: The IRS provides a tax exclusion for capital gains realized from the sale of a primary residence, which may allow you to exclude a certain amount of profit from taxation.

Possible Exception (with limitations):

While you can't directly use a 1031 exchange for your primary residence, there is a limited way you could potentially use it after a period of time:

Convert your primary residence to a rental property: You could potentially convert your primary residence into a rental property and rent it out for a significant period (ideally a few years).
Then perform a 1031 exchange: After establishing the property as an investment property, you may be able to use a 1031 exchange to sell it and acquire a like-kind investment property (like a rental property or commercial building), thereby deferring the capital gains tax from the sale of the former primary residence.

Important Considerations:

You cannot use the proceeds of the sale to purchase a new personal residence if you use a 1031 exchange.
The new property must be an investment property for the exchange to qualify.
Consult with a tax professional or a 1031 exchange specialist to discuss your specific situation and understand the eligibility requirements and potential consequences of using a 1031 exchange.

BRRRR:

Buy, Rehab, Rent, Refinance, Repeat

In summary,

selling a primary residence to buy another primary residence with a 1031 exchange is not allowed.

The 1031 exchange is intended for investment properties, not personal residences.

1031 Exchange:

aka "like-kind exchange" - a tax-deferred exchange under Section 1031 of the Internal Revenue Code (Form 8824) that allows real estate investors to defer capital gains taxes when they sell an investment property and reinvest the proceeds into a similar or "like-kind" property.

Like-Kind Exchanges Under IRC Section 1031