California still recognizes personal property exchanges for certain taxpayers. Does not recognize OZs.
With the enactment of AB-91 “Loophole Closure and Small Business and Working Families Tax Relief Act of 2019” in the fall of 2019, California finally conformed its state tax code, to several of the changes to the federal tax code made by the Tax Cuts and Jobs Act of 2017 (“TCJA”). The state partially conformed to the changes to IRC Section 1031 which limited exchanges to real property only.[1] At the federal level, prior to the passage of the TCJA, taxpayers were able to exchange personal property held for business or investment us in order to defer federal capital gains taxes and potentially defer income taxes in most states, depending on their level of conformity to Section 1031. However, unlike the federal limitation on personal property exchanges, California continues to allow like-kind exchanges of personal property for individual taxpayers with adjusted gross income (AGI) under $250,000 (or $500,000 for taxpayers filing as head of household, surviving spouse, or married filing jointly). The amendment to state law applies to 1031 exchanges started after January 10, 2019.[2]
Prior to AB-91’s enactment, all CA taxpayers were able to conduct tax deferred exchanges of personal property used in a trade or business, because CA still conformed to IRC Section 1031 as it was on January 1, 2015.[3]
Also, of note is that with the passage of in AB-91, the California Legislature opted not to address Opportunity Zones (“OZs”), Section 1400-Z, of the Internal Revenue Code. The state legislature debated conforming to OZs for several years before opting not to include them in this legislation. Other legislation at that time and subsequent proposed legislation considered limited conformity to the OZ program. For example, OZ projects limited to certain uses or purposes, such as: workforce housing, low-income housing, renewable energy, etc.[4] In addition, the state considered limiting the aggregate amount of capital gains that can be deferred into OZs, for state tax purposes by any individual Qualified Opportunity Fund.
The California Franchise Tax Board explanation of the law is summed up below:
“When California conforms to federal tax law changes, we do not always adopt all of the changes made at the federal level. For more information, go to ftb.ca.gov and search for conformity. Additional information can be found in FTB Pub. 1001, Supplemental Guidelines to California Adjustments, the instructions for Schedule CA (540), California Adjustments – Residents, or Schedule CA (540NR), California Adjustments – Nonresidents or Part-Year Residents, and the Business Entity tax booklets. .. ”
“California does not conform to the deferral and exclusion of capital gains reinvested or invested in federal opportunity zone funds under IRC Sections 1400Z-1 and 1400Z-2, and has no similar provisions. If, for California purposes, gains from investment in qualified opportunity zone property had been included in income during previous taxable year, do not include the gain in the current year income.”
The above and other information regarding reporting gain or loss from the sale of capital assets is available at https://www.ftb.ca.gov/forms/2023/2023-565-d-instructions.html
Taxpayers and their advisors should consider state and local law conformity to the TCJA and federal tax code in general when evaluating potential returns from a 1031 exchange or other investment strategies involving property located in California. If you are interested in a tax deferred exchange of real property located in California or another state, please contact the team of experts at Legal 1031 or email
[1] Several states including California do not automatically conform to changes in federal tax law. “California law does not automatically conform to changes to federal tax law, except for specific retirement provisions. Instead, the Legislature must affirmatively conform to federal changes.” See CA Senate Committee on Budget and Fiscal Review Report, available at: https://leginfo.legislature.ca.gov/faces/billAnalysisClient.xhtml?bill_id=201920200AB91
[2] See links to the final version of the law and analysis here: https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB91
[3] “We conform to IRC section 1031 as it was on January 1, 2015. As of January 1, 2018, federal law changed to limit 1031 to real property. We do not conform to this change.” See https://www.ftb.ca.gov/file/personal/reporting-like-kind-exchanges.html (last visited September 9, 2019).
[4] See report and recommendations of California Legislature Analysts Office, available at: https://lao.ca.gov/Publications/Report/4038
Legal 1031 Exchange Services, LLC does not provide tax or legal advice, nor can we make any representations or warranties regarding the tax consequences of any transaction. Taxpayers must consult their tax and/or legal advisors for this information. Disclosure: This to advise you that, unless otherwise expressly indicated, any perceived federal tax advice contained in this article/communication, including attachments and enclosures, is not intended or written to be used, and may not be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.
Written by:
James T. Walther, Esq., LL.M.
General Counsel
Legal 1031 Exchange Services, LLC
September 10, 2019, Updated January 2025