Thinking about selling an investment property in San Rafael but not ready to take a tax hit? A 1031 exchange can help you defer federal capital gains taxes when you swap one investment property for another. If you invest in Marin, the timelines and local nuances matter as much as the numbers. In this guide, you will learn the core rules, the two critical deadlines, how to identify replacement properties correctly, and how to plan around Marin-specific realities so your deferral stays intact. Let’s dive in.
What a 1031 exchange does
A 1031 exchange lets you defer federal capital gains tax when you sell real property held for investment or business and buy another like-kind investment property. After 2017, exchanges are limited to real property. Personal property like equipment or artwork does not qualify.
For real property, like-kind is broad. You can exchange a San Rafael rental for a multifamily building, a retail storefront, an office, raw land, a tenancy-in-common interest, or a Delaware Statutory Trust interest, as long as both the relinquished and replacement properties are held for investment or business. Replacement property must be in the United States.
The exchange is reported on IRS Form 8824 for the year of the exchange. Keep in mind that a 1031 defers taxes, including potential depreciation recapture. It does not eliminate them.
The two critical deadlines
Two hard deadlines start the day you close on the sale of your relinquished property:
- Identification period: You have 45 days to identify potential replacement properties.
- Exchange period: You have 180 days to acquire your replacement property or properties. The 180 days includes the first 45 days.
These timelines are strict. Missing either deadline generally disqualifies the exchange. Extensions are rare and usually limited to federally declared disaster situations. In a competitive Marin market, early planning and backup options are essential.
How to identify replacement properties
Your identification must be in writing, signed by you, and delivered to the person holding your exchange funds, usually the qualified intermediary. It must be unambiguous. Use precise addresses, legal descriptions, or assessor parcel numbers.
You can use one of these identification rules:
- Three-Property Rule: Identify up to three properties of any value.
- 200% Rule: Identify any number of properties as long as their total fair market value does not exceed 200% of the value of the relinquished property at the exchange start.
- 95% Rule: If you identify more than the 200% limit, you must acquire at least 95% of the total value you identified to keep the exchange valid.
Examples that fit San Rafael and Marin:
- Identify a single mixed-use property in downtown San Rafael by street address.
- Identify three options, such as a 6-unit building in Novato, a duplex in San Anselmo, and a San Rafael mixed-use property.
- Use the 200% rule when selling a high-value San Rafael asset and targeting several lower-priced replacements across Marin.
Step-by-step in Marin County
Here is a practical sequence that aligns with local escrow and lending realities:
- Pre-sale planning
- Decide on a 1031 strategy before you list. Engage a qualified intermediary and sign the exchange agreement before your sale closes.
- Talk with a CPA or tax attorney about capital gains, depreciation recapture, state reporting, and basis planning.
- Sale of the relinquished property
- Direct the sale proceeds to the qualified intermediary at closing. Do not receive funds yourself.
- Confirm vesting and exchange language in your escrow instructions.
- Identification window, first 45 days
- Deliver your written identification to the qualified intermediary on time. Keep proof of delivery.
- Start expedited due diligence on your top replacements, including inspections, title, and zoning.
- Acquisition window, by 180 days
- Close on the replacement property with qualified intermediary funds, or a mix of your funds and intermediary funds, while avoiding boot.
- Make sure closing documents show the exchange structure that your qualified intermediary requires.
- After closing
- File Form 8824 with your federal return for the year of the exchange.
San Rafael and Marin specifics to check
San Rafael and Marin have local factors that can affect timing, financing, and risk. Plan for these early in your 45-day window.
- Zoning and entitlements: Historic districts, floodplain mapping, and downtown overlays can limit use or redevelopment. Confirm permitted uses before you identify.
- Tenant and rent rules: California has statewide tenant protections. Check City of San Rafael and Marin County requirements. Tenants in place can influence financing terms and closing timelines.
- Environmental and insurance: Properties near the waterfront, wetlands, or in special flood zones may require added reviews and different insurance. Build in time for underwriting.
- Local escrow timelines: Due diligence and closings in Marin often take 30 to 60 days. Have backup replacements in case an inspection or permit issue slows a deal.
Exchange structures to consider
Depending on your timing and goals, other formats may fit better than a standard forward exchange.
- Reverse exchange: Buy first, then sell, with an Exchange Accommodation Titleholder holding title to avoid constructive receipt of funds. This can help when a prime San Rafael property appears before your sale closes. It is more complex and usually more expensive.
- Improvement exchange: Use exchange funds to improve the replacement property while the qualified intermediary holds funds. Both improvements and final closing must be complete within 180 days, so careful planning is key.
- DST or TIC: For a more passive approach, a Delaware Statutory Trust or tenancy-in-common can qualify as replacement property. Review sponsor documents and restrictions with your qualified intermediary and advisors.
Taxes to plan with your CPA
Work with your CPA to understand the following ahead of time:
- Boot and taxable gain: Any cash or non-like property you receive is taxable up to the amount of your realized gain. A smaller replacement loan than your original loan can create mortgage boot.
- Basis and depreciation: Your deferred gain reduces the basis of the replacement property. Depreciation schedules carry forward and influence future tax exposure.
- Depreciation recapture: Prior depreciation may be recaptured on sale, with federal rates historically up to 25% for real property. A 1031 defers, but does not erase, recapture.
- California reporting: California generally follows federal rules for real property exchanges. Confirm current California treatment and any state-level forms or disclosures with your tax advisor.
Mistakes to avoid
These are common errors that can cost you your deferral:
- Waiting to hire the qualified intermediary until after your sale closes.
- Receiving sale proceeds yourself, which triggers a taxable sale.
- Missing the 45-day identification or 180-day acquisition deadline.
- Vague identification, such as describing “any property in Marin” without precise details.
- Overlooking related-party rules and required holding periods.
- Failing to plan for boot, including mortgage boot.
- Skipping due diligence on zoning, tenant rights, or environmental issues that affect value and timing.
Real-world San Rafael scenarios
Consider how these approaches might work for you:
- Scenario A, like-kind swap within Marin: You sell a 4-unit San Rafael rental. Within 45 days you identify three options, such as a 6-unit in Novato, a duplex in San Anselmo, and a San Rafael mixed-use property. You close on your preferred choice by day 180 using qualified intermediary funds.
- Scenario B, reverse exchange in a tight market: You find a small San Rafael storefront you want to lock up before your sale closes. An Exchange Accommodation Titleholder holds title to the replacement, then you transfer your relinquished property within 180 days.
- Scenario C, passive route to a DST: You sell a San Rafael duplex and identify a Delaware Statutory Trust offering that fits your investment goals. You review sponsor materials, confirm eligibility with your qualified intermediary and CPA, then acquire your DST interest within 180 days.
Quick checklist for Marin investors
Use this to keep your exchange on track:
- Decide on a 1031 strategy before you list your property.
- Select and sign with a qualified intermediary before your sale closes.
- Coordinate timing and structure with your CPA or tax attorney.
- Build a target list and be ready to identify in writing within 45 days.
- Align escrow instructions, vesting, and funds flow with your qualified intermediary.
- Verify zoning, tenant rights, rent rules, and environmental risks on each target.
- Confirm lender requirements and schedule your financing to close within 180 days.
- Keep thorough records and file Form 8824 for the exchange year.
Getting started in San Rafael
A successful 1031 in Marin comes down to timing, precision, and local expertise. You want clear identification, clean escrow coordination, and backup options that fit your goals. In San Rafael, that also means understanding zoning overlays, tenant protections, and how lenders underwrite properties with tenants in place.
Team O’Brien brings hyper-local insight and a high-touch process to help you navigate these steps. We can help you price and position your relinquished property, surface on-market and private options for replacements through agent networks, and coordinate with local escrow teams and your qualified intermediary. If you are exploring a DST, TIC, reverse exchange, or an improvement strategy, we will work in sync with your CPA, attorney, and lender to keep your timeline on track.
If you are planning a sale or scouting replacements in San Rafael, let’s talk about your goals and build an actionable 1031 plan. Reach out to Team O'Brien - David & Deirdre to get started.
FAQs
What is a 1031 exchange for San Rafael investors?
- A 1031 exchange lets you defer federal capital gains tax by selling an investment or business property and buying another like-kind real property in the United States.
How strict are the 45-day and 180-day deadlines?
- The 45-day identification and 180-day acquisition windows are hard deadlines that start at closing on your sale and are rarely extended.
What counts as like-kind property in Marin?
- Like-kind for real property is broad, so you can exchange between asset types such as rentals, retail, office, land, TIC interests, or a Delaware Statutory Trust.
Can I use a 1031 to buy a DST interest?
- Yes, a Delaware Statutory Trust interest can qualify as replacement real property when held for investment and structured correctly.
What is boot in a 1031 exchange?
- Boot is cash or non-like property you receive, including a reduction in mortgage balance, and it is taxable to the extent of your realized gain.
Do California rules align with federal 1031 rules?
- California generally conforms for real property exchanges, but you should confirm current state reporting and any nuances with a California tax advisor.
