<h2 aria-level="2" paraeid="{0d22cba4-f96a-424b-9d67-8abfdebb5081}{240}" paraid="970933433" role="heading">Where Did the Term “1031 Exchange” Come From?&nbsp;&nbsp;</h2>

<p paraeid="{0d22cba4-f96a-424b-9d67-8abfdebb5081}{246}" paraid="1667805467">The term "1031 Exchange" originates from Section 1031 of the Internal Revenue Code, established in 1954 as an amendment to the Federal Tax Code. This section codified the definition and rules for tax-deferred exchanges of like-kind properties, allowing investors to defer capital gains taxes when exchanging real estate or certain other property held for business or investment. Initially part of Section 112(b)(1) in the Revenue Act of 1921 (later renumbered in the Revenue Act of 1928), this section ultimately became known as Section 1031, leading to the term “1031 Exchange”.&nbsp;</p>

<h2 aria-level="2" paraeid="{0d22cba4-f96a-424b-9d67-8abfdebb5081}{252}" paraid="530416512" role="heading">The Origins of Section 1031: The Revenue Act of 1921&nbsp;</h2>

<p paraeid="{828eae59-aac6-44e0-8424-deaf708f07c5}{3}" paraid="1464953628"><a href="https://www.accruit.com/blog/history-1031-exchanges">The Revenue Act of 1921</a> was pivotal in establishing tax-deferred exchanges, allowing investors to exchange properties without immediate capital gains tax. Section 202 of the Act required exchanged properties to be of similar use, or "like-kind," to prevent investors from avoiding taxation by exchanging real estate for non-real estate assets. Congress noted that if no cash exchanged hands, the “continuity of an investment” should not trigger a taxable event. In 1954, an amendment to the Federal Tax Code clarified and strengthened the definition of a tax-deferred, like-kind exchange, establishing a clearer structure for real estate exchanges that shaped how 1031 Exchanges are conducted today.&nbsp;&nbsp;</p>

<h2 aria-level="2" paraeid="{828eae59-aac6-44e0-8424-deaf708f07c5}{22}" paraid="469079274" role="heading">How 1031 Exchanges Benefit Investors and the Economy&nbsp;</h2>

<p paraeid="{828eae59-aac6-44e0-8424-deaf708f07c5}{34}" paraid="1084485337">The <a href="https://www.accruit.com/blog/how-1031-exchanges-stimulate-economy">bene… of 1031 Exchanges</a>&nbsp;not only impact property owners, but also significantly contribute to economic growth.&nbsp;</p>

<h3 aria-level="3" paraeid="{828eae59-aac6-44e0-8424-deaf708f07c5}{53}" paraid="827337357" role="heading">Encourages Real Estate Transactions and Ensures Investment Continuity&nbsp;&nbsp;&nbsp;</h3>

<p paraeid="{828eae59-aac6-44e0-8424-deaf708f07c5}{59}" paraid="449527427">By deferring capital gains taxes through a 1031 Exchange, investors are allowed to retain more of their profits for reinvestment and encouraged to move forward with real estate transactions that might otherwise be delayed or abandoned. This not only promotes the free flow of property transactions but also provides continuity for income-generating investment. Engaging in a 1031 Exchange can support portfolio growth, diversification, and the acquisition of higher-value properties. By moving from a lower-performing asset to one that generates greater income or appreciation potential, investors can enhance their long-term financial prospects. Additionally, 1031 Exchanges provide a strategic exit plan for property owners. For instance, farmers and ranchers approaching retirement can sell their properties without incurring immediate tax liabilities, allowing them to reinvest 100% of their proceeds into passive-income properties, such as multifamily residences or commercial real estate. This strategy not only secures their financial future but also encourages ongoing investment in their communities.&nbsp;</p>

<h3 paraeid="{828eae59-aac6-44e0-8424-deaf708f07c5}{69}" paraid="1798013610">Promoting Regional Investment and Development&nbsp;</h3>

<p paraeid="{828eae59-aac6-44e0-8424-deaf708f07c5}{75}" paraid="267592479">1031 Exchanges are a powerful tool in broadening investment opportunities. Investors are not limited to their local markets, as they can exchange properties across different states or regions. This flexibility enables them to diversify their holdings, reinvest in emerging markets with high growth potential, and acquire more productive like-kind properties. 1031 Exchanges also promote the efficient use of real estate. By encouraging property owners to sell underperforming assets and reinvest in more productive ones, the overall quality and productivity of properties within a market can improve. This can lead to revitalization in certain areas, driving further economic development and community growth. The resulting improvements can enhance property values, increase tax revenues for local governments, and contribute to a more dynamic economy.&nbsp;&nbsp;</p>

<h3 aria-level="3" paraeid="{828eae59-aac6-44e0-8424-deaf708f07c5}{83}" paraid="1274178244" role="heading">Job Creation&nbsp;</h3>

<p aria-level="1" paraeid="{828eae59-aac6-44e0-8424-deaf708f07c5}{89}" paraid="1197009261" role="heading">Each individual 1031 Exchange transaction stimulates employment and business growth by engaging various industries. By allowing investors to defer capital gains taxes, 1031 Exchanges activate higher transaction volumes in the real estate market, increasing demand for services from agents, brokers, and appraisers. For example, when an investor upgrades to a more productive property, it often requires renovations or improvements, generating job opportunities in the construction industry for contractors, laborers, and related services. The changing of hands of property also boosts the need for property management services, creating jobs for leasing agents and maintenance staff. Additionally, executing a 1031 Exchange often requires legal and financial expertise, resulting in increased demand for attorneys, tax advisors, and Qualified Intermediaries. Ultimately, each 1031 Exchange employs many individuals across different fields, benefitting individuals, families, and the community at large.&nbsp;</p>

<p paraeid="{828eae59-aac6-44e0-8424-deaf708f07c5}{95}" paraid="1810877950">As we celebrate National 1031 Day, it’s important to acknowledge the lasting benefits that 1031 Exchanges offer to individuals, communities, and the overall US economy.&nbsp;&nbsp;</p>

<p paraeid="{828eae59-aac6-44e0-8424-deaf708f07c5}{104}" paraid="1234226790">Happy 1031 Day!&nbsp;&nbsp;</p>

<p paraeid="{828eae59-aac6-44e0-8424-deaf708f07c5}{110}" paraid="712095558">&nbsp;</p>

<p paraeid="{828eae59-aac6-44e0-8424-deaf708f07c5}{110}" paraid="712095558"><em>The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.    &nbsp;&nbsp;&nbsp;</em></p>

<p paraeid="{828eae59-aac6-44e0-8424-deaf708f07c5}{34}" paraid="1084485337"><em>&nbsp;</em></p>

<h2 aria-level="2" paraeid="{48574077-7954-4c2a-baa0-76edb3af23e8}{4}" paraid="1082840514" role="heading">Maximize Retirement Contributions&nbsp;</h2>

<p paraeid="{48574077-7954-4c2a-baa0-76edb3af23e8}{10}" paraid="247270431">One of the easiest ways to lower taxable income is by contributing to retirement accounts like a 401(k) or IRA. For 2024, the contribution limits for 401(k)s are $23,000, with an additional $7,500 catch-up contribution allowed for those 50 or older. Maxing out 401(k) contributions not only boosts retirement savings but also reduces taxable income, as contributions are made pre-tax. Contributions to traditional IRAs are also tax-deductible, with a maximum limit of $7,000, with an additional $1,000 catch-up contribution for individuals 50 or older. Contributions to a Roth IRA are not tax-deductible, but they grow tax-free and allow for qualified withdrawals in retirement. Individuals who are self-employed can contribute to a SEP IRA or Solo 401(k), with limits based on earnings. For SEP IRAs, you can contribute up to 25% of your income, with a maximum of $69,000 for 2024. These contributions can reduce your taxable income and grow tax-deferred until retirement. Maxing out retirement contributions before the year closes out can save you current or long-term taxes as well as ensure long-term financial security.&nbsp;&nbsp;</p>

<h2 aria-level="2" paraeid="{48574077-7954-4c2a-baa0-76edb3af23e8}{20}" paraid="429313463" role="heading">Harvest Investment Losses&nbsp;</h2>

<p paraeid="{48574077-7954-4c2a-baa0-76edb3af23e8}{26}" paraid="1701735148">Tax-loss harvesting is another useful strategy to consider before year-end. Tax-loss harvesting is the strategic sale of assets at a loss to offset capital gains taxes owed from selling profitable assets. It’s often used to reduce short-term capital gains, which are taxed at higher rates than long-term gains. Investors typically employ this tactic at the end of the year to minimize taxes by selling investments that have decreased in value to claim a credit against their gains. For 2024, up to $3,000 of net losses can be used to offset ordinary income, with any remaining losses carried over to future years. With this, it is important to not only be aware that selling an asset at a loss disrupts the balance of a portfolio, but to avoid a wash-sale scenario.&nbsp;&nbsp;&nbsp;</p>

<h3 aria-level="4" paraeid="{48574077-7954-4c2a-baa0-76edb3af23e8}{34}" paraid="760120134" role="heading">The Wash-Sale Rule&nbsp;</h3>

<p paraeid="{48574077-7954-4c2a-baa0-76edb3af23e8}{40}" paraid="1422173578">The wash-sale rule is an IRS regulation that disallows a tax deduction on an asset sold at a loss if the same or a "substantially identical" asset is repurchased within 30 days before or after the sale. This rule prevents investors from selling assets just to claim a tax benefit and quickly buying them back. In a wash sale, the loss is not deductible but added to the cost basis of the new purchase. Violating the rule can lead to fines or trading restrictions.&nbsp;</p>

<h2 aria-level="2" paraeid="{48574077-7954-4c2a-baa0-76edb3af23e8}{56}" paraid="2085514689" role="heading">Take Advantage of Expiring Tax Provisions&nbsp;</h2>

<p paraeid="{48574077-7954-4c2a-baa0-76edb3af23e8}{62}" paraid="1796890739">Certain tax provisions are set to expire at the end of 2024 and could provide one-time benefits that won't be available in future tax years, possibly yielding significant savings. For example, the temporary provision for bonus depreciation for businesses is set to change in 2025. In 2024, eligible businesses can deduct up to 80% of the cost of qualified assets, like equipment and machinery, in the year they are put into use. However, this rate will decrease to 60% next year, so it’s important to make purchases or invest in qualifying assets before December 31 to benefit from the higher deduction. Additionally, the expanded Child Tax Credit, which was temporarily raised to $3,600 per child under 6 and $3,000 for children aged 6 to 17 under previous COVID-19 relief laws, may return to lower amounts unless extended by Congress. Eligible families should make sure they claim the full credit available for 2024. Other expiring tax benefits may involve temporary deductions, credits, or incentives introduced through recent legislation, such as tax credits for energy-efficient home improvements, including solar panel installations. Some of these provisions are specific to certain years or projects, so reviewing any applicable expiring credits, such as those for residential energy efficiency upgrades, can help you maximize savings before the end of year.&nbsp;</p>

<h2 aria-level="2" paraeid="{48574077-7954-4c2a-baa0-76edb3af23e8}{70}" paraid="1708705519" role="heading">Review Your Tax Withholding and Estimated Payments&nbsp;</h2>

<p paraeid="{48574077-7954-4c2a-baa0-76edb3af23e8}{78}" paraid="1440870863">Lastly, it’s important to review your tax withholding or estimated tax payments to avoid underpayment penalties. If you’ve experienced significant income changes in 2024, adjusting your withholding now can prevent surprises when you file your return.&nbsp;</p>

<p paraeid="{48574077-7954-4c2a-baa0-76edb3af23e8}{84}" paraid="335056024">Start by checking your paycheck and W-4 form to ensure your withholding aligns with your tax obligations. If you’ve had too much withheld, adjusting your W-4 now can increase your take-home pay. If you’ve withheld too little, you may owe taxes when filing and face penalties. For self-employed individuals or those with additional income, review your estimated tax payments. Ensure you've made sufficient quarterly payments, especially if your income has fluctuated. Adjusting your remaining estimated payments can help avoid underpayment penalties.&nbsp;</p>

<h2 aria-level="2" paraeid="{48574077-7954-4c2a-baa0-76edb3af23e8}{94}" paraid="1471756725" role="heading">1031 Exchanges and Real Estate Tax Considerations&nbsp;</h2>

<p paraeid="{48574077-7954-4c2a-baa0-76edb3af23e8}{100}" paraid="2011675533">If you're in the real estate sector or thinking about selling investment property, consider using a 1031 Exchange to defer capital gains taxes. A 1031 Exchange allows you to reinvest proceeds from the sale of real estate into a new property without immediately paying taxes associated with the real estate transaction. This is particularly useful if you’re selling at year-end but don’t want to realize the gain in 2024. For more on how to structure a 1031 Exchange, consult a Qualified Intermediary like Accruit.&nbsp;</p>

<p paraeid="{48574077-7954-4c2a-baa0-76edb3af23e8}{106}" paraid="603278926">For investors who are on the fence about selling property in Q4 or delaying listing the property until Q1 2025, <a href="https://www.accruit.com/blog/1031-exchange-tax-straddling-2023">1031 tax straddling</a> could be a compelling reason to list the property now rather than waiting until 2025. If a 1031 Exchange spans multiple tax years, i.e. is started in 2024, but the 180-day exchange period extends into 2025, and the Exchanger fails to identify or acquire Replacement Property, the Exchanger may still be able to defer capital gains taxes until the 2025 tax due date under IRS Installment Sale rules (Section 453). This provides flexibility in managing tax obligations, even in failed exchanges. &nbsp;</p>

<p paraeid="{48574077-7954-4c2a-baa0-76edb3af23e8}{122}" paraid="2055660139">Conducting a 1031 Exchange in Q4 can provide flexibility. If the exchange fails due to missed deadlines, any returned funds become taxable in 2024. However, the default reporting allows for the deferral of capital gains payment on the sale of the Relinquished Property until the 2025 taxes are due, which coincides with the deadline for filing individual 2025 tax returns. By combining Section 1031 with Section 453, Exchangers can report exchange funds as income in the year received rather than the year of the sale, which provides a potential benefit for those considering a Q4 sale. &nbsp;</p>

<p paraeid="{48574077-7954-4c2a-baa0-76edb3af23e8}{133}" paraid="1107631825">An additional consideration for 1031 Exchanges started in Q4 of 2024 is to ensure you get the full 180-day exchange period. Specifically for 1031 Exchanges started after October 18th, it is important to plan your tax filing accordingly. The exchange deadline would be the individuals tax return due date, which is April 15th, rather than day 180 which would fall after April 15th. To take full advantage of the 180-day exchange period, you will need to<a href="https://www.accruit.com/blog/what-happens-if-1031-exchange-spans-two-ta…; file an extension</a> for your 2024 taxes. Keep in mind that for individuals in Maine and Massachusetts, the tax filing deadline is April 17th, 2025. Other states, such as Delaware, Iowa, Louisiana, and Virginia may have differing deadlines for filing state tax returns. By filing an extension, you can utilize the entire 180-day period to complete your exchange without the pressure of an imminent tax return deadline. &nbsp;</p>

<p paraeid="{48574077-7954-4c2a-baa0-76edb3af23e8}{183}" paraid="579101922">By reviewing and implementing these tax strategies now, you can significantly reduce your 2024 tax burden and set yourself up for financial success in the coming year. Always consult with a tax professional to personalize your strategy and ensure you’re making the most of available opportunities.&nbsp;</p>

<p paraeid="{48574077-7954-4c2a-baa0-76edb3af23e8}{189}" paraid="188942979">&nbsp;</p>

<p paraeid="{48574077-7954-4c2a-baa0-76edb3af23e8}{193}" paraid="1459019094"><em>The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.&nbsp;</em></p>

<p>Common questions we receive from Exchangers include, "Is it possible to 1031 Exchange into a REIT", "Do QIs facilitate a 721 Exchange?", and "What is the process if I ultimately want to reinvest my 1031 exchange funds into a REIT?"</p>

<p>This educational video breaks down the steps involved when an Exchanger's end goal is to invest their 1031 exchange funds into a REIT. Steps include utilizing a Delaware Statutory Trust (DST) as Replacement Property in a 1031 Exchange, a holding period of the DST interest, then using a 721 UPREIT to swap the interest in the DST for&nbsp;Operating Partnership (OP) units in a REIT.&nbsp;</p>

<p>Watch this video below to better understand the process, as well as this this article, <a href="https://www.accruit.com/blog/can-you-1031-exchange-reit&quot; title="Can you use a 1031 Exchange to invest into a REIT?">Can you 1031 Exchange into a REIT?</a></p>

<p class="text-align-center"><iframe allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share" allowfullscreen="" frameborder="0" height="315" referrerpolicy="strict-origin-when-cross-origin" src="https://youtube.com/embed/j7BGHIb7VzE&quot; title="YouTube video player" width="560"></iframe></p>

<h3 paraeid="{89b384a6-5521-41e7-a220-e57e6779373d}{185}" paraid="760886701">Due to Hurricanes Milton and Helene, the IRS has issued Tax Relief for Florida, Alabama, Georgia, North Carolina, South Carolina, and counties in Tennessee and Virginia.</h3>

<p paraeid="{89b384a6-5521-41e7-a220-e57e6779373d}{209}" paraid="1575914963">Affected Taxpayers have until <strong>May 1, 2025</strong>, to make tax payments and file for various individual and business tax returns. &nbsp;</p>

<p paraeid="{89b384a6-5521-41e7-a220-e57e6779373d}{223}" paraid="1717754693">Currently, all individuals and households that reside in or have a business within Florida, Alabama, Georgia, North Carolina, South Carolina, and counties in Tennessee and Virginia qualify for tax relief. Any area added to the disaster area at a later time will also qualify for tax relief.&nbsp;</p>

<p paraeid="{2d59011b-ff0d-41d7-9586-40d6e2c73323}{7}" paraid="683544783">An “Affected Taxpayer” includes individuals who live, and businesses whose principal place of business is in the Covered Disaster Area. Affected Taxpayers are entitled to relief regardless of where the relinquished property or replacement property is located. Affected Taxpayers may choose either the General Postponement relief under Section 6 OR the Alternative relief under Section 17 of Rev. Proc. 2018-58. Taxpayers who do not meet the definition of Affected Taxpayers do not qualify for Section 6 General Postponement relief.&nbsp;</p>

<p paraeid="{2d59011b-ff0d-41d7-9586-40d6e2c73323}{25}" paraid="513249592">Option One: General Postponement under Section 6 of Rev. Proc. 2018-58nt under Section 6 of Rev. Proc. 2018-58 (Affected Taxpayers only). Any 45-day deadline or 180-day deadline (for either a forward or reverse exchange) that falls on or after the Disaster Date above is postponed to the General Postponement Date. The General Postponement applies regardless of the date the Relinquished Property was transferred (or the parked property acquired by the EAT) and is available to Affected Taxpayers regardless of whether their exchange began before or after the Disaster Date.&nbsp;</p>

<p paraeid="{2d59011b-ff0d-41d7-9586-40d6e2c73323}{41}" paraid="1955077523">Option Two: Section 17 Alternative (Available to (1) Affected Taxpayers and (2) other Taxpayers who have difficulty meeting the exchange deadlines because of the disaster. See Rev. Proc. 2018-58, Section 17 for conditions constituting “difficulty”). Option Two is only available if the relinquished property was transferred (or the parked property was acquired by the EAT) on or before the Disaster Date. Any 45-day or 180-day deadline that falls on or after the Disaster Date is extended to THE LONGER OF: (1) 120 days from such deadline; OR (2) the General Postponement Date. Note the date may not be extended beyond one year or the due date (including extensions) of the tax return for the year of the disposition of the relinquished property (typically, if an extension was filed, 9/15 for corporations and partnerships and 10/15 for other Taxpayers). &nbsp;</p>

<p paraeid="{2d59011b-ff0d-41d7-9586-40d6e2c73323}{41}" paraid="1955077523"><a href="https://www.irs.gov/newsroom/irs-help-available-to-victims-of-hurricane… for full details on the tax relief.&nbsp;</a></p>

<p paraeid="{2d59011b-ff0d-41d7-9586-40d6e2c73323}{71}" paraid="136598657">&nbsp;</p>

<p paraeid="{2d59011b-ff0d-41d7-9586-40d6e2c73323}{71}" paraid="136598657"><em>The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.&nbsp;</em></p>

<p>Accruit is proud to announce that two of our esteemed team members,&nbsp;Maritza Castillo&nbsp;and&nbsp;Dina Bardakh, have successfully earned their Certified Exchange Specialist^®&nbsp;(CES^®) designations. This significant achievement underscores their expertise and dedication to the field of 1031 exchanges.</p>

<p>To receive the CES^®&nbsp;designation,&nbsp;Maritza and Dina had to meet specific work experience criteria and pass a rigorous exam covering 1031 exchange rules, critical activities of an exchange facilitator, and ethical issues that may arise during a 1031 exchange. Their success in attaining this certification demonstrates their high level of knowledge and competency, reinforcing their ability to provide exceptional service to our clients.</p>

<p>The CES^®&nbsp;Certification Council within the Federation of Exchange&nbsp;Accommodators (FEA) administers the CES^®&nbsp;exam, which was first conducted in&nbsp;May 2003. Since then, the CES^®&nbsp;designation has become a mark of excellence within the industry, signifying that the holder possesses extensive knowledge and experience in 1031 exchanges.</p>

<p>"We are thrilled to celebrate Maritza's and Dina's accomplishment and proud to have them as part of the Accruit team," said&nbsp;Brent Abrahm, President and CEO of Accruit. "Their dedication to professional development and excellence reflects our company's commitment to providing the highest quality service to our clients."</p>

<p>Maritza and Dina join a distinguished group of professionals who have earned the CES^®&nbsp;designation, showcasing their commitment to upholding the highest standards in the industry. Accruit is proud to now boast eight total CES^®&nbsp;on staff, in addition to the rest of highly qualified team.</p>

<p><b>About Accruit</b></p>

<p>Accruit, an Inspira Financial Solution, is a leading full service Qualified Intermediary and developer of the industry's only patented 1031 Exchange technology. Founded in 2000 and acquired by Inspira Financial in 2023, Accruit has gained the trust of thousands of clients and become a leader in the industry through its highly credentialed experts, consistent delivery of service, innovative technologies, robust security protocols and financial strength.</p>

<h2 aria-level="1" paraeid="{c2cdbaed-d914-4b30-baef-224ac6460f21}{207}" paraid="1006723899" role="heading">Current Landscape of Commercial Real Estate Transactions in California&nbsp;</h2>

<p paraeid="{c2cdbaed-d914-4b30-baef-224ac6460f21}{213}" paraid="1953687892">In recent years, California has seen a significant rise in commercial real estate transactions, driven by a diversified economy. In 2023, commercial real estate transactions in California totaled over $60 billion, a 15% increase from the previous year. Multifamily and industrial properties have led the market, with multifamily properties comprising approximately 40% of all transactions. This can be attributed to persistent housing shortages in the face of high demand, particularly in urban areas. A large factor contributing to the success of these properties is the pandemic and the subsequent post-pandemic recovery period, which heightened the need for stable and affordable housing. The multifamily sector continues to remain strong due to California's ongoing housing crisis, where demand is outpacing supply. With the state's population growth and urbanization trends, these properties offer promising returns and long-term value appreciation. The pandemic and post-pandemic market trends have also shown a skyrocketing growth in e-commerce, which has resulted in an immense need for distribution and fulfillment centers. As businesses adapted to these changes, investors recognized the potential of industrial properties, such as warehouses and distribution centers, which have become increasingly vital in the supply chain. As the market evolves, understanding these dynamics will be crucial for making informed investment decisions that maximize returns in California’s competitive real estate environment.&nbsp;</p>

<h2 aria-level="1" paraeid="{c2cdbaed-d914-4b30-baef-224ac6460f21}{225}" paraid="553929563" role="heading">Statistical Trends Favoring 1031 Exchanges&nbsp;</h2>

<p paraeid="{c2cdbaed-d914-4b30-baef-224ac6460f21}{231}" paraid="529051867">With high property values and significant transaction volumes, the potential for 1031 Exchanges in California is immense. The state is notorious for commanding some of the highest real estate prices in the country, with the average sales price for commercial properties in California hovering at approximately $1.5 million, with urban centers like San Francisco and Los Angeles often seeing even higher prices. For example, in San Francisco, commercial properties can easily surpass the $2 million mark, driven by the city’s tech boom and limited space for expansion. Similarly, in Los Angeles, prime commercial properties in sectors such as entertainment and media are securing premium prices due to their central locations and increasing demand.&nbsp;</p>

<p paraeid="{c2cdbaed-d914-4b30-baef-224ac6460f21}{239}" paraid="667287614">As California’s economy continues to diversify, the demand for commercial real estate is expected to grow even further. Emerging sectors like technology, biotech, and renewable energy are driving new real estate development and acquisitions. The tech sector alone is projected to add over 200,000 jobs in the state by 2025, a surge that will undoubtedly drive greater demand for office space, research facilities, and other commercial properties. Additionally, the push for sustainability and renewable energy is driving the need for industrial spaces and manufacturing facilities. As these industries grow, investors can use 1031 Exchanges to transition their assets into high-growth sectors, staying ahead of market trends while deferring taxes and maximizing returns.&nbsp;</p>

<h2 aria-level="1" paraeid="{c2cdbaed-d914-4b30-baef-224ac6460f21}{245}" paraid="668368243" role="heading">Tax Liabilities Specific to California&nbsp;&nbsp;</h2>

<p paraeid="{c2cdbaed-d914-4b30-baef-224ac6460f21}{253}" paraid="1859410152">Utilizing a 1031 Exchange can help mitigate significant tax liabilities that an investor would face in the high-cost market of California. But while considering a 1031 Exchange, it is important to understand exactly what tax liabilities Californian transactions could be subject to, as well as recognizing the regulating bodies in charge.&nbsp;&nbsp;</p>

<h4 aria-level="3" paraeid="{34efe19e-2a10-4038-b623-cbee78ac5fe9}{4}" paraid="2014923053" role="heading">California Franchise Tax Board (FTB)&nbsp;</h4>

<p paraeid="{34efe19e-2a10-4038-b623-cbee78ac5fe9}{10}" paraid="893340637">The California Franchise Tax Board (FTB) is the taxing authority for the State of California that collects corporate and state income taxes. The FTB plays a key role in administering taxes related to commercial properties, including capital gains taxes on real estate sales. For 1031 Exchanges, the FTB follows federal guidelines allowing property owners to defer capital gains taxes when they reinvest proceeds into like-kind properties. However, state-specific rules may apply, such as the need to report exchanges and potentially pay deferred taxes if the Replacement Property(ies) is outside California. Compliance with both federal and state tax laws is crucial for commercial property investors using 1031 Exchanges.&nbsp;</p>

<h4 paraeid="{34efe19e-2a10-4038-b623-cbee78ac5fe9}{20}" paraid="982353413">Deferral of State Taxes:&nbsp;&nbsp;</h4>

<p paraeid="{34efe19e-2a10-4038-b623-cbee78ac5fe9}{26}" paraid="985205664">While federal tax law allows for the deferral of capital gains taxes, California has its own tax implications. Investors must understand that while the federal government allows deferral, the California Franchise Tax Board (FTB) imposes additional state taxes on the gains when the property is sold and not replaced with another California property. The capital gains from the sale of the Relinquished Property will be subject to California’s state income tax rates, which can be as high as 13.3%, depending on the Seller's income bracket. High earners, especially those selling investment properties, are subject to the upper end of this tax rate. California treats capital gains as regular income, so any gain from the sale of the Relinquished Property will be taxed according to the individual's income tax bracket. For high-income individuals, California imposes an additional 1% surtax on income exceeding $1 million. This tax is known as the "Mental Health Services Act" tax and applies to capital gains from the sale of property if the Seller’s total income surpasses $1 million. Lastly, there is withholding tax on sales by nonresidents. If the property Seller is a nonresident of California, the FTB generally requires withholding 3.33% of the total sale price, or the Seller can choose to have the withholding based on the gain from the sale instead.&nbsp;</p>

<h4 aria-level="3" paraeid="{34efe19e-2a10-4038-b623-cbee78ac5fe9}{39}" paraid="1412704618" role="heading">California Clawback Rule:&nbsp;</h4>

<p paraeid="{34efe19e-2a10-4038-b623-cbee78ac5fe9}{47}" paraid="1859310158">The California Clawback Rule refers to the state’s requirement that taxes deferred under a 1031 Exchange must eventually be paid on any gains that originated from a California property, even if the property has been exchanged for one located in another state. This rule is where the state of California "claws back" any deferred taxes once the Exchanger cashes out. Key points about this rule include:&nbsp;</p>

<p paraeid="{34efe19e-2a10-4038-b623-cbee78ac5fe9}{61}" paraid="1908164984">Gain from California Property: If California property is exchanged for out-of-state property, any gain realized from the California property remains subject to California state taxes. The state tracks the deferred capital gains on the California property.&nbsp;</p>

<p paraeid="{34efe19e-2a10-4038-b623-cbee78ac5fe9}{73}" paraid="1382062935">Filing a California Tax Return: California law requires that investors continue to file a California tax return each year, reporting the deferred gain on the Californian Relinquished Property, even if the Replacement Property(ies) is in another state.&nbsp;</p>

<p paraeid="{34efe19e-2a10-4038-b623-cbee78ac5fe9}{81}" paraid="1867660970">Tax Due Upon "Cashing Out": If the investor eventually sells the out-of-state Replacement Property(ies) and "cashes out" (does not do another 1031 Exchange), they will owe California taxes on the deferred gains from the original California Relinquished Property, in addition to any taxes due in the state where the Replacement Property(ies) is sold.&nbsp;</p>

<p paraeid="{34efe19e-2a10-4038-b623-cbee78ac5fe9}{99}" paraid="419399600">Continuous Deferral: If the investor continues to do 1031 Exchanges, they can keep deferring both federal capital gains taxes and California state taxes, but the deferred gain from the California Relinquished Property will still be tracked by California.&nbsp;</p>

<h2 aria-level="1" paraeid="{34efe19e-2a10-4038-b623-cbee78ac5fe9}{116}" paraid="528164048" role="heading">Choosing the Right Qualified Intermediary&nbsp;</h2>

<p paraeid="{34efe19e-2a10-4038-b623-cbee78ac5fe9}{122}" paraid="1379929104">To successfully complete a 1031 Exchange, it's critical to use a knowledgeable and experienced national Qualified Intermediary (QI). Given California’s specific tax rules, including the state’s "Clawback Rule" and the importance of properly adhering to the like-kind property requirements, using a QI that understands the complexities and nuances of California’s real estate and tax landscape is essential. Failing to work with an experienced, accredited QI can lead to significant financial risks, including the loss of your tax deferral benefits. As one of the nation’s leading providers of 1031 Exchange services, our experienced Accruit team and seamless processes is what investors need to ensure compliance with federal and state tax regulations.&nbsp;&nbsp;</p>

<p paraeid="{34efe19e-2a10-4038-b623-cbee78ac5fe9}{138}" paraid="1576709680">California’s growing commercial real estate market, paired with the potential of 1031 Exchanges, presents a significant opportunity for investors seeking to expand their portfolios while achieving tax deferral. By staying informed about the state’s tax implications, market trends, and the nuances of 1031 Exchanges, investors can better navigate the challenges and opportunities that California offers. Whether you're investing in multifamily housing, industrial properties, or exploring emerging sectors, utilizing a 1031 Exchange and an experienced QI, such as Accruit, could be essential in optimizing your investment strategy and achieving long-term success in this dynamic commercial market.&nbsp;</p>

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<p paraeid="{34efe19e-2a10-4038-b623-cbee78ac5fe9}{154}" paraid="489185626"><em>The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice. &nbsp;</em></p>