Thinking about selling a Coronado rental and moving into a bigger or better-performing property? A 1031 exchange could help you keep more of your capital working for you by deferring taxes when you trade into a new investment. The rules are specific and the timelines are unforgiving, which can feel stressful in a fast-moving, high-price market like Coronado. This guide breaks down the basics, the deadlines, local California factors, and how to avoid common mistakes so you can plan with confidence. Let’s dive in.
What a 1031 Exchange Does
A 1031 exchange lets you defer capital gains and depreciation recapture taxes when you sell qualifying real property held for investment or for use in a trade or business and buy like-kind real property as a replacement. It is a deferral, not forgiveness. The deferred gain is generally recognized when you eventually sell in a taxable transaction.
To fully defer tax, you typically need to do three things: reinvest all net sale proceeds, acquire replacement property of equal or greater value, and replace equal or greater debt or add cash. If you receive cash or reduce debt without offsetting it with cash, that amount is taxable “boot.”
Since 2018, only real property qualifies. Personal property like furniture, equipment, or artwork cannot be exchanged under Section 1031.
Who Can Use a 1031
You can use a 1031 exchange if you hold real property for investment or in a trade or business. Dealer inventory, such as properties held primarily for resale, generally does not qualify.
Primary residences usually do not qualify, although some niche strategies can combine the home sale exclusion with a 1031 when use changes over time. These strategies are complex and require guidance from a qualified tax advisor.
Deadlines: 45 and 180 Days
Two strict clocks start the day you transfer your relinquished property. The first is the 45-day identification deadline. You must identify potential replacement properties in writing, sign the notice, and deliver it to your qualified intermediary or another authorized party within 45 calendar days.
The second is the 180-day completion deadline. You must acquire your replacement property or properties within 180 calendar days after the transfer of the relinquished property, or by an earlier required date under the tax code if applicable. These timelines are calendar days and do not pause for weekends or holidays.
Missing either deadline almost always disqualifies the exchange. Plan early and track dates carefully.
Identification Rules
Three-property rule
You can identify up to three properties of any value. This is the most common method and works well when inventory is tight.
200% rule
You can identify more than three properties as long as the total fair market value of the properties identified does not exceed 200% of the fair market value of the property you sold.
95% exception
If you identify more than three properties and the total value exceeds 200%, you must acquire at least 95% of the aggregate value of all properties you identified. Identification must be unambiguous, such as a street address or parcel number, and delivered in writing on time.
Qualified Intermediary
Do not touch the sale proceeds. A qualified intermediary, or QI, must receive and hold the funds and facilitate the exchange documents. Taking control of the proceeds typically breaks the exchange and triggers tax.
Choose a QI with deep 1031 experience, written procedures, proof of trust accounting, and professional liability coverage. Fees vary with transaction complexity, so build those into your budget early.
Replacement Value and Debt
To avoid recognized gain, match or exceed the price of the relinquished property and reinvest all net proceeds. Also aim to replace equal or greater debt on the replacement property. If your new loan is lower, the shortfall can be mortgage boot unless you add cash to cover the difference.
Reverse and Improvement Options
A reverse exchange lets you buy your replacement property before you sell your current property. An exchange accommodation titleholder typically holds one of the properties temporarily, and the same overall 180-day limit applies. Reverse exchanges add cost and complexity and require lender cooperation, but they can be useful in Coronado where inventory is limited.
An improvement, or build-to-suit, exchange allows you to use exchange funds to improve the replacement property. The QI or an accommodation titleholder will control funds and improvements during the exchange period, and documentation is strict. These structures are specialized and require careful planning.
Related-Party Caution
Transactions with related parties, such as family members or controlled entities, face extra scrutiny and can be disallowed if a related party disposes of property soon after the exchange. Many advisors recommend holding periods, often two years or more, to reduce risk. If you are considering a related-party transaction, involve tax counsel early and document each step.
Eligible and Risky Property
Eligible property includes real estate held for investment or business use, such as single-family rentals, multifamily, commercial buildings, industrial, raw land, and certain long-term leasehold interests treated as real property under state law.
Ineligible or risky property includes personal residences, inventory or dealer property, and all personal property items that no longer qualify after 2018. If a property has mixed personal and investment use, document your investment intent and activity with leases, advertising, and management records to support eligibility.
Depreciation recapture is also deferred in a 1031, but it is not eliminated. When you sell the replacement property in a taxable sale, both capital gains and any recapture are generally recognized unless new qualifying rules apply, such as a step-up in basis at death.
Coronado and California Notes
Coronado is a small, high-value market with limited inventory and strong demand. That can make timing challenging, since you must identify and close on a replacement property quickly. Because options can be scarce, some investors consider reverse exchanges to lock in desirable assets, but these come with higher costs and more moving parts.
Short-term rental and local use rules matter. Coronado has local regulations that can limit or condition short-term rentals and other uses. If you are relying on rental income, verify current Coronado municipal code and planning guidelines for zoning, permitting, and operating rules before you identify a property.
California generally follows federal 1031 treatment for real property, and California capital gains are taxed as ordinary income. Be sure you understand any state filing requirements. For property taxes, 1031 exchanges do not automatically prevent reassessment. Transfers are often reassessed under California law unless an exclusion applies, so confirm details with the San Diego County Assessor.
Also consider any documentary transfer taxes, recording fees, and county charges that may apply in San Diego County. Build these into your cash flow and debt planning during the exchange.
Common Pitfalls
- Receiving sale proceeds yourself instead of using a QI.
- Missing the 45-day identification or 180-day completion deadlines.
- Vague or late property identification.
- Assuming escrow timelines will align with exchange deadlines without coordination.
- Failing to replace debt or to add cash to prevent mortgage boot.
- Trying to exchange dealer inventory or a primary residence.
- Poor documentation of investment intent for mixed-use or vacation properties.
- Using inexperienced QIs or title and escrow teams unfamiliar with 1031 procedures.
- Entering related-party deals without specialist tax advice.
Planning Checklist
- Decide early whether a forward, reverse, or improvement exchange fits your goal and your Coronado timeline.
- Engage a reputable qualified intermediary before you close the sale of your relinquished property.
- Coordinate with lenders early so loan payoffs and new financing do not create unintended boot.
- Choose your identification method and prepare written identifications for delivery within 45 days.
- Keep complete records: settlement statements, QI agreements, identification notices, and closing documents.
- Consult a CPA or tax attorney and, if needed, an exchange attorney before you sign contracts.
- Include exchange-friendly contingencies in your contracts to help you comply with the rules.
- Verify Coronado zoning, use, and any short-term rental limits before identifying a property.
Costs and Tax Rates
Budget for QI fees, escrow and title fees, recording costs, possible higher title premiums in reverse exchanges, lender fees for new financing, and legal and tax advisory costs. Add local recording or transfer charges that may apply in San Diego County.
For context, federal long-term capital gains rates are generally 0%, 15%, or 20% depending on income, and high earners may owe the 3.8% Net Investment Income Tax. California taxes capital gains as ordinary income, with top marginal rates that can be significant. The combined effect is one reason investors use 1031 exchanges to defer tax, but remember that deferral is not elimination.
Next Steps in Coronado
A successful 1031 exchange in Coronado comes down to early planning, strict timeline management, and local market execution. With limited inventory and high price points, lining up financing, identifying strong replacement options, and coordinating the right QI and escrow team are essential.
If you want a local partner to help you source on- and off-market options, pressure-test timelines, and coordinate the moving parts with your QI and advisors, connect with Scott Harden. You will get hands-on guidance rooted in coastal San Diego expertise and a concierge approach that protects your time and investment.
FAQs
What is a 1031 exchange and how does it work?
- It is a federal rule that lets you defer capital gains and depreciation recapture when you sell qualifying investment or business real estate and buy like-kind real property within strict 45- and 180-day timelines using a qualified intermediary.
How strict are the 45- and 180-day deadlines?
- Extremely strict; both run from the day you transfer the relinquished property, use calendar days, and are not extended for weekends or holidays, so late identification or closing usually disqualifies the exchange.
What properties qualify in Coronado?
- Real property held for investment or business use, such as rentals or commercial assets, generally qualifies, while personal residences, dealer inventory, and personal property items do not.
Can I move into my 1031 replacement home?
- Personal use can jeopardize eligibility; strategies that involve converting use require careful timing and documentation, so consult a tax advisor before pursuing any personal occupancy plan.
What counts as taxable boot?
- Cash you take out of the exchange or a reduction in mortgage debt on the replacement property that you do not offset with added cash are common examples of boot and are typically taxable.
Do 1031 exchanges avoid property tax reassessment?
- No; 1031 is an income tax deferral tool and does not automatically prevent property tax reassessment under California law, so confirm rules and any exclusions with the San Diego County Assessor.
When would a reverse exchange make sense in Coronado?
- When inventory is scarce and you need to secure a desirable property before selling, a reverse exchange can help, but it adds cost, complexity, and lender requirements that you must plan for.
