The Quiet Reshaping of the California 1031 Exchange — What AB 1611, the State Clawback, and the DST Trend Actually Mean for You
By Johnny Lynum, MBA | Lt Col, USAF (Ret.) | Licensed Wealth Advisor
Back in the Air Force, we had a saying: bad information travels faster than good orders. Somebody hears a partial brief, repeats it with confidence, and three conversations later the whole squadron thinks something happened that never did. I've watched the same thing play out this year with California real estate owners and a new law called AB 1611.
If you own investment property in California, you've probably heard some version of "1031 exchanges are getting killed in California." It's the kind of headline that spreads fast and gets the details wrong. So let's slow down and get the actual brief… because the real story isn't as simple as "nothing changed," and it isn't as dramatic as "everything changed" either.
AB 1611: What It Actually Does (And Who It Actually Affects)
California's Assembly Bill 1611 targets a narrow slice of the market: sellers who, directly or indirectly, own 50 or more single-family rental homes. For those large owners, the bill removes the ability to defer California tax on the sale of a single-family home through a 1031 exchange; the gain gets recognized for state tax purposes instead, effective for sales completed after January 1, 2026.
That's the entire scope. It doesn't touch:
Individual investors
Married couples with a handful of rentals
Small LLCs holding a modest portfolio
Commercial property owners
Multifamily, industrial, or retail investors of any size
If you're the person who bought a duplex or a couple of single-family rentals over the years and built real equity the disciplined way: one property, one tenant, one decision at a time; this bill was written for a completely different kind of owner than you. The legislation is aimed at large institutional landlords, and the individual 1031 exchange strategy remains fully intact for the vast majority of California property owners.
I bring this up first because I've had more than one conversation this year with an owner who was ready to rush a sale, or abandon a 1031 strategy altogether, based on a headline rather than the actual bill text. Don't let secondhand information make a six-figure decision for you.
The Rule That Actually Deserves Your Attention: California's Clawback
Here's where I want you to lean in, because this is the part of California 1031 exchange rules that catches far more investors off guard than AB 1611 ever will, and it's been on the books for years, not new for 2026.
California doesn't fully release its claim on a deferred gain just because you exchange out of state. If you sell California property and roll your 1031 proceeds into replacement property somewhere else- Texas, Tennessee, Florida, wherever- California tracks that deferred gain through an annual filing, FTB Form 3840, and taxes it when you eventually sell the replacement property in a taxable transaction. This applies even if you've long since moved out of California yourself.
In plain terms: exchanging your way out of state defers the California tax bill. It does not eliminate it. A lot of investors discover this years and multiple exchanges into a strategy they assumed had already closed the door on California's involvement.
There are really only two ways to fully close that loop on California-sourced gain:
Hold the replacement property until death, at which point heirs generally receive a stepped-up basis, and the deferred gain effectively disappears under current law.
Route the equity through a specific charitable strategy designed for that purpose, a more specialized planning conversation with your tax and legal team.
Everything short of those two paths is deferral, not elimination. That's not a flaw in your strategy; it's simply the reality of what a 1031 exchange does and doesn't accomplish, and it needs to be part of your planning from day one, not a discovery you make down the road.
Why DSTs Are Showing Up in More California Conversations
This is the genuinely new development worth your attention, especially if you own property in a coastal or high-value California market where finding a suitable replacement property inside your 45-day identification window is its own source of stress.
As we covered earlier in this series, a Delaware Statutory Trust lets you exchange your relinquished property for a fractional, passive interest in institutional-grade real estate: multifamily, industrial, self-storage, senior housing; without stepping back into an active landlord role. The IRS settled the "does this count as like-kind" question back in 2004, so the structure itself isn't new or experimental. What's shifted is how the math is landing for California owners specifically.
More owners are running the comparison: direct ownership versus a DST, and finding the passive route more compelling than it might have looked a few years ago. No more chasing tenants. No more scrambling to identify a qualifying property in a market where good inventory moves fast. For an investor sitting on substantial equity built over a decade or two, trading active management for passive income and broader diversification isn't a step down. For a lot of owners, it's the more rational execution of the same 1031 strategy they were already planning to use.
One thing that doesn't change, though: the clawback rule still applies to a DST exchange the same way it applies to a direct exchange. A DST removes operational headaches. It doesn't remove California's claim on California-sourced gain if you're exchanging into an out-of-state trust.
Three Questions Every California Owner Should Be Asking Right Now
Does AB 1611 actually apply to me - or am I reacting to a headline about a law that targets a completely different kind of owner?
What does the clawback rule mean for my specific gain, my specific timeline, and whether I'm planning to stay in California or move the equity out of state?
Is a DST genuinely the better fit for where I am in life and in this market - or am I just following this year's trend without running my own numbers?
None of these questions have a one-size-fits-all answer. They depend on your basis, your timeline, whether you're planning to hold until death or sell again in ten years, and what your actual replacement property options look like today. That's not a research problem you solve by reading one more article; it's a "let's look at your specific numbers together" problem.
The Discipline This Moment Requires
Every time the rules shift… even narrowly, even for a segment of owners that isn't you, it's tempting to make a reactive decision. In the Air Force, reactive decisions under incomplete information are how mistakes happen. The better move is always the same: get the actual brief, understand exactly what applies to your situation, and then execute deliberately.
For most individual California property owners, the 1031 exchange is still fully available, still a legitimate tax-deferral tool, and still worth building into a comprehensive exit and retirement strategy. The clawback rule and the growing role of DSTs are simply new variables to factor into that plan, not reasons to abandon it, and not reasons to panic into a rushed sale either.
Important Disclosures
This article is for educational purposes only and does not constitute tax, legal, or investment advice. Information regarding Assembly Bill 1611 and California's clawback provision (FTB Form 3840) reflects publicly available legislative and tax information as of this writing and is subject to change; this article does not address every provision, exception, or definitional detail of the underlying law. Whether AB 1611 or the clawback rule applies to your specific situation depends on individual facts and circumstances. DST investments involve substantial risk, including illiquidity and potential loss of principal, and are generally suitable only for accredited investors. Past performance is not indicative of future results, and no strategy guarantees a specific tax outcome. Please consult a qualified CPA and attorney familiar with California tax law before making decisions based on this information.
Ready to Get Your Specific Numbers in Front of Someone Who Can Map This Out?
If you're weighing a sale in the next 6–12 months and want to understand exactly how AB 1611, the California clawback, and a potential DST strategy apply to your situation, not someone else's, let's have that conversation.
- Johnny Lynum, MBA
Lt Col, USAF (Ret.) | Private Wealth Advisor
Founder, REI Genius & Lynum Capital Partners
Host, Million Dollar Coffee Hour & DealMakers Club
Mission: Faith, Family, Freedom, Financial Security.
p: 757-551-2989
e: johnny@johnnylynum.com
