Thinking about selling a Novato rental and trading up, but worried about taxes eating into your proceeds? You’re not alone. Many Marin owners want to reposition their portfolio without triggering a large capital gains bill. This guide breaks down the basics of a 1031 exchange, the timelines you must hit, common pitfalls, and practical local steps so you can move with confidence. Let’s dive in.

What a 1031 exchange is

A 1031 like-kind exchange lets you defer federal capital gains and depreciation recapture taxes when you sell investment or business-use real estate and buy qualifying replacement real estate. The key benefit is deferral, not elimination. The deferred gain is recognized later if you sell without another exchange, or it may be addressed through future planning like estate transfers.

After the Tax Cuts and Jobs Act, only real property qualifies. Personal property does not. California generally follows federal treatment for like-kind exchanges, though state filing details can differ, so coordinate with a CPA on California Franchise Tax Board reporting.

In Marin’s high-value market, the dollars at stake are often significant. Local transfer taxes, recording, and escrow practices also factor into timing and closing. Plan early and make sure your team aligns the exchange steps with local closing logistics.

Properties that qualify

To qualify, both the property you sell and the one you buy must be real property held for investment or for use in a trade or business.

• Primary residences generally do not qualify.
• Like-kind is broad for real estate. A Novato rental can typically be exchanged for another California rental, an out-of-state rental, or investment land.
• Your use and intent matter. Replacement property intended for personal use can jeopardize the exchange.

The 45- and 180-day rules

Two strict federal deadlines control your exchange. Missing either one usually disqualifies the exchange.

• Identification period: You have 45 days from the sale of your relinquished property to identify replacement property in writing. Deliver the signed identification to your qualified intermediary or another permitted party.
• Exchange period: You must receive the replacement property within 180 days of the sale, or by your tax return due date for that year if earlier. The 180 days run at the same time as the 45 days.

Identification rules at a glance

You have three common ways to identify replacement property:

• Three-property rule: Identify up to three properties of any value.
• 200% rule: Identify any number of properties as long as the total value does not exceed 200% of the value of the property you sold.
• 95% exception: Identify any number of properties and acquire at least 95% of their aggregate value.

Choosing the right approach depends on your deal flow and how quickly you can negotiate and close.

Avoiding boot and debt surprises

“Boot” is taxable value received that is not like-kind real estate. It can be cash left over, personal property included in a deal, or a reduction in your mortgage liability.

• If your replacement property’s debt is less than the debt you paid off at sale, that shortfall can be taxable boot.
• To fully defer gain, match or exceed the value and the debt of the property you sold. If needed, add cash to offset a debt reduction.

Common exchange types

Most Marin investors use a delayed exchange, but there are other structures for specific needs.

• Delayed exchange: You sell first, a qualified intermediary holds the proceeds, and you buy a replacement within 180 days.
• Reverse exchange: You acquire the replacement before you sell. A special accommodator holds title to one property temporarily. This is more complex and often costlier.
• Improvement exchange: Exchange funds are used to improve the replacement during the exchange period through the accommodator. Strict timing applies.

Step-by-step for Novato owners

Use this high-level workflow to stay on track.

1. Pre-sale planning

• Meet with a CPA and a real estate attorney to confirm eligibility and review your holding period and use.
• Decide on exchange type, with delayed exchanges being most common.
• Select a qualified intermediary and sign the exchange agreement before closing your sale. You cannot receive the sale proceeds.

2. Listing and contract

• When you accept an offer, execute assignment language so escrow routes funds to the QI at closing.
• Plan your identification strategy with your advisors and line up viable replacements early.

3. Close the sale (day 0)

• Proceeds go directly to the QI. Your 45-day clock starts at closing.

4. Identify replacements (within 45 days)

• Send a signed, dated written identification with a clear property description to the QI or another permitted party.
• Diligence your identified options and be ready to pivot if a deal falls through.

5. Close the replacement (within 180 days)

• The QI uses exchange funds to acquire the replacement. Structure financing to avoid boot.

6. Post-exchange reporting

• File Form 8824 with your federal return for the year of your sale and coordinate California filings with your CPA.

Your exchange team

• Qualified intermediary: Holds proceeds, prepares exchange documents, receives identification, and coordinates closings. Must be independent.
• CPA/tax advisor: Models your tax deferral and recapture, calculates basis, and prepares Form 8824 and California filings.
• Real estate attorney: Reviews contract language, related-party issues, and local transfer matters.
• Escrow/title: Implements QI instructions and ensures clean title and proper transfers.
• Local agent: Times your sale and purchase to fit the 45/180 schedule and helps source on- and off-market replacements.

Pitfalls to avoid

• Missing deadlines: The 45- and 180-day clocks are absolute. Use calendar alerts and build backup options.
• Touching the money: If you receive or can access proceeds, the exchange fails. Route funds to the QI.
• Vague or late identification: Follow QI identification forms and delivery rules precisely.
• Unequal debt: Replacing with less debt can create boot. Involve your lender early.
• Related-party missteps: Special rules apply. Get legal advice before proceeding.
• Quick personal-use conversion: Maintain investment or business use for a reasonable period and document your intent.
• Inexperienced QI: Vet credentials, procedures, references, and bonding or insurance.

Quick checklist

• Talk to a CPA and select a QI before you list.
• Know the 45-day identification and 180-day closing deadlines.
• Exchange only real property held for investment or business use.
• Do not receive sale proceeds. Funds must go to the QI.
• Replace equal or greater value and debt to fully defer gain.
• File Form 8824 and coordinate California reporting with your CPA.
• Vet your QI’s experience, procedures, and fees.
• If family, entities you control, or personal-use plans are involved, consult counsel early.
• If you plan to downsize or take cash out, model partial exchange or other strategies with your CPA.

Useful resources

For deeper background and official guidance, review these authoritative sources:

• Read the IRS overview in Publication 544 on sales and dispositions, including like-kind exchanges. See the IRS discussion in IRS Publication 544.
• Learn about exchange structures and QI standards from the Federation of Exchange Accommodators.

How we help in Marin

Timing and inventory are everything in a 1031. In Marin, well-prepped listings move quickly, and quality replacements can trade off market. With personalized representation, Compass tools like Concierge for pre-sale prep, and private or exclusive channels for discreet placements, you can position your sale and source your next investment on your timeline. If your strategy includes cross-market moves into Wine Country or select San Francisco neighborhoods, our regional reach helps you identify viable replacements within the 45-day window.

Ready to map your options and align your sale and purchase? Connect with Donna Goldman to plan a tailored path forward.

FAQs

What is a 1031 exchange for Novato rental owners?

• A 1031 lets you sell investment real estate and buy qualifying replacement real estate while deferring federal capital gains and depreciation recapture, subject to strict rules and timelines.

How do the 45-day and 180-day rules work?

• You must identify replacement property in writing within 45 days of your sale and complete the purchase within 180 days, with both deadlines running from the sale date.

Does California follow federal 1031 rules for Marin owners?

• California generally conforms to federal treatment, but state filing details can differ, so coordinate with a CPA on California Franchise Tax Board requirements.

Can I move into my replacement property after an exchange?

• Replacement property should be held for investment or business use; converting quickly to personal use can jeopardize the exchange, so document investment intent and hold appropriately.

What is boot in a 1031 exchange for Marin investors?

• Boot is taxable value you receive that is not like-kind real estate, including cash left over or reduced mortgage debt on the replacement property.

Do I need a qualified intermediary for a Novato exchange?

• Yes, a QI must hold the proceeds and coordinate documentation; receiving or controlling sale funds yourself generally invalidates the exchange.