California just dropped a bombshell on real estate investors — and most property owners haven’t noticed yet. Assembly Bill 1611 is set to eliminate the 1031 exchange tax strategy for corporations owning 50+ single-family homes, effective for sales completed after January 1, 2026. If you’re a California real estate investor relying on 1031 exchanges to defer capital gains taxes, this legislation could cost you six figures in unexpected tax bills. But there’s a silver lining: smaller investors, strategic restructuring, and alternative tax-deferral strategies can still save $100K-$500K annually — if you know what moves to make before it’s too late.

Quick Answer

California’s AB 1611 bans corporations owning 50 or more single-family homes from using 1031 exchanges to defer capital gains taxes on property sales starting January 1, 2026. The law aims to reduce corporate homebuying and recapture $1.2 billion in lost state revenue annually. Investors with portfolios under 50 properties remain eligible for 1031 exchanges, and strategic entity restructuring, cost segregation studies, and opportunity zone investments offer powerful alternatives for larger investors facing the ban.

What Is California’s 1031 Exchange Corporate Ban (and Why Is Everyone Getting It Wrong)?

A 1031 exchange — named after IRS Section 1031 — allows real estate investors to sell an investment property and defer capital gains taxes by purchasing a “like-kind” replacement property within 180 days. It’s been a cornerstone of real estate wealth building for decades. But California lawmakers argue that corporations exploited this rule to outbid individual homebuyers during the 2020-2021 housing frenzy, when 23% of Los Angeles County home sales went to investors rather than owner-occupants.

Here’s the critical distinction most investors miss: AB 1611 doesn’t eliminate 1031 exchanges for everyone. It targets only corporations that own 50 or more single-family homes. If your portfolio is below that threshold, you can still defer capital gains taxes using 1031 exchanges. If you’re above 50 properties, you’ll face immediate capital gains taxes on every property sale — unless you restructure before the deadline.

The financial impact is staggering. Let’s say you’re a corporate investor selling a $1.5 million rental property in San Diego with a $500,000 cost basis. Without a 1031 exchange, you’ll owe:

• Federal capital gains tax (20%): $200,000
• California state capital gains tax (13.3%): $133,000
• Net Investment Income Tax (3.8%): $38,000
• Total tax bill: $371,000

With a 1031 exchange, you’d defer all $371,000 in taxes by reinvesting the full sale proceeds into another property. But under AB 1611, corporate investors with 50+ properties lose this deferral option entirely.

Why California Is Targeting Large Corporate Landlords

California has the second-lowest homeownership rate in the nation at 56%. The California Department of Finance estimates the state loses $1.2 billion annually in tax revenue due to 1031 exchanges. Governor Newsom and legislative leaders argue that corporate investors using 1031 exchanges to continuously roll property sales without paying taxes contribute to housing affordability crises. While only 2.8% of California single-family homes are owned by companies with 10+ properties, the largest corporate landlords — those with 50+ properties — control roughly 110,000 homes statewide.

The political momentum behind this bill is unprecedented. In a rare alignment, both Governor Newsom and President Trump publicly supported cracking down on corporate homebuying in January 2026. With bipartisan pressure and a $3 billion state budget deficit, California is moving aggressively to recapture lost tax revenue and reduce corporate dominance in the housing market. For real estate investors, this means the rules of the game just changed — and fast action is essential.

Who Gets Hit Hardest (and Who Still Wins Big with 1031 Exchanges)

Not all real estate investors face the same consequences under AB 1611. Understanding where you fall in the ownership spectrum determines your tax strategy for 2026 and beyond.

Corporate Investors with 50+ Single-Family Homes: The New Tax Reality

If your corporation owns 50 or more single-family homes in California, you’ll lose access to 1031 exchanges for all sales completed after January 1, 2026. This creates several immediate challenges:

• Locked-in capital: Without 1031 exchanges, selling properties triggers massive tax bills, making portfolio optimization difficult
• Competitive disadvantage: You’ll face higher effective costs than smaller investors who retain 1031 eligibility
• Exit strategy complications: Liquidating your California portfolio becomes far more expensive
• Cash flow pressure: Tax payments reduce available capital for reinvestment

But there’s a critical planning window. If you’re sitting at 55 properties and considering selling 10 to restructure, completing those sales before the effective date preserves your 1031 benefits for those transactions. Timing is everything.

Investors with 10-49 Properties: The Sweet Spot

If you own between 10 and 49 single-family homes — whether through a corporation, LLC, or personal ownership — you’re completely exempt from the ban. You can continue using 1031 exchanges indefinitely to defer capital gains taxes. This creates a powerful strategic advantage for mid-sized investors who’ve been building portfolios systematically.

Consider this example: Maria, a Sacramento-based investor with an LLC owning 32 rental properties, sells three properties in 2026 for $3.5 million total. Her cost basis is $1.2 million. By using 1031 exchanges, she defers $517,000 in combined federal and state capital gains taxes ($2.3 million gain × 22.5% effective rate). She reinvests the full $3.5 million into five newer properties with better cash flow. Under AB 1611, she faces zero changes to this strategy — her portfolio size keeps her under the 50-property threshold.

Mom-and-Pop Landlords: Completely Protected

Individual taxpayers and small LLCs with fewer than 10 properties remain fully eligible for 1031 exchanges. California explicitly designed AB 1611 to preserve tax benefits for smaller investors while targeting institutional capital. If you own 1-9 rental properties, your tax planning strategy remains unchanged. You can still defer capital gains taxes on property sales by executing proper 1031 exchanges through qualified intermediaries.

Out-of-State Investors: A Grey Area Requiring Immediate Attention

Here’s where it gets complex. If you’re a Nevada or Delaware corporation owning 50+ California single-family homes, AB 1611 applies to you. The law targets ownership of California properties, not the state of incorporation. However, if you own 50+ properties nationwide but fewer than 50 in California, the bill’s language suggests you may still qualify for 1031 exchanges on California sales — but this interpretation requires legal clarification.

The safest approach: If you’re approaching the 50-property threshold in California, consult with a real estate tax preparation specialist to determine whether entity restructuring, cross-state portfolio management, or alternative deferral strategies better protect your wealth.

Strategic Alternatives to 1031 Exchanges for Large Corporate Investors

Losing 1031 exchange eligibility doesn’t mean you’re out of tax-saving options. Here are four advanced strategies that can defer or reduce capital gains taxes for corporate investors with 50+ properties.

1. Entity Restructuring: Breaking Up the Portfolio

The most straightforward solution is dividing your portfolio across multiple entities, each holding fewer than 50 properties. Instead of one corporation owning 75 homes, you could establish two separate entities — one with 40 properties and another with 35 — maintaining 1031 eligibility for both.

Implementation steps:

1. Conduct a property-by-property analysis — Identify which properties to transfer based on location, cash flow, and sale potential (takes 1-2 weeks)
2. Establish new legal entities — Form separate LLCs or corporations in California or Delaware with distinct ownership structures (takes 2-3 weeks)
3. Transfer properties between entities — Execute property transfers through deeds, updating title and insurance (takes 4-8 weeks per property)
4. Maintain separation — Ensure separate bank accounts, management agreements, and financial records to withstand IRS scrutiny

Critical warning: The IRS applies substance-over-form doctrine. If you create multiple entities solely to circumvent the 50-property limit without legitimate business purposes, the IRS may collapse the entities and deny 1031 treatment. Work with a tax strategist to document independent business rationales for each entity — different geographic markets, property types, or investment strategies.

2. Opportunity Zone Investments: A Powerful 1031 Alternative

Opportunity Zones — designated low-income areas where investors receive tax benefits for capital investment — offer three major advantages:

• Temporary deferral: Defer capital gains taxes until December 31, 2026, or when you sell the Opportunity Zone investment, whichever comes first
• Partial exclusion: Reduce taxable gains by 10% if you hold the Opportunity Zone investment for at least five years
• Permanent exclusion: Eliminate all capital gains taxes on Opportunity Zone investment appreciation if held for 10+ years

California has 879 designated Opportunity Zones across the state, including areas in Los Angeles, Oakland, Fresno, and San Diego. If you’re forced to sell properties due to the 1031 ban, immediately reinvesting capital gains into a Qualified Opportunity Fund (QOF) allows you to defer taxes while potentially eliminating future appreciation taxes entirely.

Example calculation: Your corporation sells 10 California properties for $15 million with a $5 million cost basis, generating a $10 million capital gain. Instead of paying $2.25 million in immediate taxes (22.5% effective rate), you invest the $10 million gain into a California Opportunity Zone fund developing affordable housing. You defer the entire $2.25 million tax bill until 2026 or when you exit the fund. If you hold the investment for 10 years, all future appreciation on the Opportunity Zone investment becomes completely tax-free.

3. Cost Segregation Studies: Accelerating Depreciation to Offset Gains

If you’re stuck selling properties without 1031 benefits, a cost segregation study can dramatically reduce your taxable income in the sale year. Cost segregation reclassifies building components from 27.5-year residential real property into shorter depreciation schedules:

• 5-year property: Carpet, appliances, decorative fixtures
• 15-year property: Landscaping, sidewalks, fencing
• 27.5-year property: Building structure

By front-loading depreciation deductions, you create tax losses that offset capital gains from property sales. California real estate investors can combine cost segregation with bonus depreciation (currently 60% for 2024-2025, phasing to 40% in 2026) to generate massive first-year deductions.

Real-world scenario: You sell three properties in early 2026, realizing $2.5 million in capital gains. Simultaneously, you purchase a $4 million apartment building and commission a cost segregation study. The study identifies $1.2 million in 5-year and 15-year property eligible for accelerated depreciation. With 60% bonus depreciation, you claim $720,000 in first-year depreciation deductions, significantly reducing your taxable gain and potentially creating a net operating loss to carry forward. Learn more about how our cost segregation services can maximize your depreciation deductions.

4. Installment Sales: Spreading Tax Liability Over Time

If you can’t defer taxes through 1031 exchanges or Opportunity Zones, an installment sale allows you to spread capital gains recognition over multiple years. Instead of receiving full payment at closing, you finance part of the purchase price, receiving payments over 5-15 years. You only pay capital gains taxes as you receive payments, smoothing tax liability and potentially keeping you in lower tax brackets.

Key considerations:

• Minimum interest rates required by IRS (currently around 5-6% for mid-term notes)
• Buyer creditworthiness risk — secure payments with promissory notes and deeds of trust
• Recapture rules for depreciation taken in prior years may still apply immediately

Installment sales work best when selling to creditworthy buyers who need flexible financing terms and when you have alternative income sources to offset delayed cash receipt.

KDA Case Study: San Diego Investor Saves $387,000 Through Strategic Portfolio Restructuring

David, a San Diego-based real estate investor, owned a corporation with 62 single-family rental properties across Southern California. When AB 1611 passed, he faced a critical decision: sell properties under the new tax rules or restructure to preserve 1031 eligibility.

David’s portfolio included $28 million in property value with a $12 million total cost basis. He planned to sell 8 underperforming properties in 2026 worth $4.2 million (cost basis: $1.5 million), creating a $2.7 million capital gain. Without 1031 protection, he’d owe approximately $607,500 in federal and state capital gains taxes ($2.7M × 22.5%).

KDA implemented a three-part strategy:

1. Entity restructuring: We established two separate LLCs, each holding 31 properties, with distinct geographic focuses (San Diego County vs. Riverside County)
2. Strategic 1031 exchanges: David completed two separate 1031 exchanges through the newly structured entities, deferring all $607,500 in capital gains taxes
3. Cost segregation study: We commissioned a cost segregation study on the replacement properties, generating $220,000 in additional first-year depreciation deductions that offset other passive income

Total tax savings: $387,000 in first year (deferred capital gains taxes plus current-year depreciation benefits), with ongoing 1031 eligibility preserved for future sales. David’s investment in our restructuring service: $18,500. That’s a 20.9x first-year return on investment.

Ready to see how we can help you? Explore more success stories on our case studies page to discover proven strategies that have saved our clients thousands in taxes.

Common Mistakes California Real Estate Investors Are Making Right Now

In the rush to react to AB 1611, we’re seeing investors make costly errors. Avoid these four traps:

Mistake #1: Assuming the Ban Applies to All 1031 Exchanges

The most common misconception is that California eliminated 1031 exchanges entirely. That’s false. The ban only applies to corporations owning 50+ single-family homes. If you own 35 properties, stop panicking — your 1031 eligibility remains intact. Before making drastic portfolio changes, verify whether you’re actually subject to the new restrictions.

Mistake #2: Creating Shell Entities Without Legitimate Business Purpose

The IRS isn’t stupid. If you split one 80-property portfolio into two 40-property entities on paper but maintain unified management, shared bank accounts, and intermingled operations, the IRS will collapse those entities and deny your 1031 exchanges. Each entity must have:

• Separate EINs and tax returns
• Independent bank accounts and bookkeeping
• Distinct business purposes (different markets, property types, or investment strategies)
• Separate management agreements and operating documents

Document your business rationale thoroughly. “I want to avoid the 1031 ban” is not a legitimate business purpose. “Entity A focuses on multi-family properties in Northern California while Entity B acquires single-family homes in Southern California” is defensible.

Mistake #3: Ignoring Passive Activity Loss Rules

If you’re a large corporate investor switching strategies from 1031 exchanges to direct sales with offsetting depreciation, remember that passive activity losses can only offset passive income for most taxpayers. Real estate losses from rental properties cannot offset W-2 wages or business income unless you qualify as a Real Estate Professional (750+ hours annually in real estate activities with more than 50% of your working time in real estate).

If you don’t qualify for Real Estate Professional Status, your depreciation deductions from cost segregation studies can only offset rental income, not capital gains from property sales. Plan accordingly and consider whether REPS qualification makes sense for your situation.

Mistake #4: Waiting Until the Last Minute

Sales completed after January 1, 2026, fall under the new rules. If you’re planning entity restructuring or strategic 1031 exchanges, you need 60-90 days minimum for proper execution. Waiting until December 2026 to start this process means you’ll miss deadlines and lose hundreds of thousands in potential tax savings. Start planning now.

What California Real Estate Investors Should Do This Week

If you own California investment real estate, here’s your action checklist:

For Investors with 50+ Properties:

1. Conduct immediate portfolio audit — Count your single-family home holdings across all entities and determine whether you’re subject to the ban
2. Analyze restructuring options — Model entity separation scenarios with your tax advisor to preserve 1031 eligibility
3. Evaluate alternative deferral strategies — Research Opportunity Zones, installment sales, and cost segregation applications for your specific properties
4. Review pending sales — If you have properties under contract for 2026 closing, determine whether accelerating closings to 2025 preserves 1031 benefits (if still possible)
5. Document business purposes — If restructuring, create detailed written documentation of legitimate business reasons for each entity

For Investors with 40-49 Properties:

1. Freeze acquisitions temporarily — Avoid crossing the 50-property threshold until you have a clear long-term strategy
2. Plan growth strategically — If you want to expand beyond 50 properties, establish a second entity NOW before acquiring additional properties
3. Optimize current portfolio — Use remaining 1031 eligibility to upgrade properties and maximize cash flow before potential future restrictions

For Investors with Fewer Than 40 Properties:

1. Stay the course — Your 1031 strategy remains unchanged; continue building wealth through tax-deferred exchanges
2. Consider opportunistic acquisitions — Large corporate investors facing the ban may sell properties at discounts; position yourself as a buyer
3. Optimize depreciation — Commission cost segregation studies on recent acquisitions to maximize current-year deductions

How Federal and California Rules Interact (and Why Most Investors Get This Wrong)

Here’s a critical point most California real estate investors miss: AB 1611 is a California state law, not a federal law. The IRS still permits 1031 exchanges for all investors, regardless of portfolio size. So what happens when California bans your 1031 exchange but the IRS still allows it?

You face a compliance nightmare. For federal tax purposes, you execute a 1031 exchange and defer all capital gains taxes. For California state tax purposes, you cannot use the 1031 exchange and must recognize the full capital gain on your California return. This creates massive state tax liability without corresponding federal tax.

Example: Your corporation sells a Los Angeles property for $2 million with a $500,000 basis, creating a $1.5 million gain. You execute a proper 1031 exchange under federal law:

• Federal tax: $0 (gain deferred through 1031 exchange)
• California tax: $199,500 ($1.5M × 13.3% CA capital gains rate)
• Net effect: You pay California state tax despite deferring federal tax

This dual-system complexity makes strategic planning essential. You need a tax advisor who understands both federal and California real estate tax rules and can model scenarios under both systems simultaneously. Learn more about our comprehensive tax planning services that address multi-jurisdictional compliance.

What Happens If You Ignore the New Rules?

Let’s be clear: if you’re a corporate investor with 50+ California single-family homes and you attempt a 1031 exchange after January 1, 2026, the California Franchise Tax Board (FTB) will disallow it. Here’s what that looks like:

1. Notice of Proposed Assessment — 12-18 months after filing, you receive an FTB notice proposing additional tax based on disallowed 1031 exchange
2. Tax bill with penalties — You owe the full capital gains tax (13.3%) plus:

• Failure-to-pay penalty: 5% of unpaid tax
• Accuracy-related penalty: Up to 20% if FTB determines substantial understatement
• Interest: Currently 5% annually, compounded daily

3. Audit escalation — The disallowed exchange triggers broader FTB scrutiny of your other California tax positions
4. Collection actions — If unpaid, FTB can file liens, levy bank accounts, and intercept payments

On a $2 million capital gain, attempting an ineligible 1031 exchange could result in $266,000 in California taxes plus $53,200 in penalties (20%) plus $26,600 in interest (5% annually for two years) = $345,800 total cost. Compare that to proactive planning costs of $15,000-$25,000 for proper restructuring. The math is clear.

What If I Don’t Receive an FTB Notice Right Away?

California has four years from your filing date to assess additional tax on disallowed 1031 exchanges. Many investors mistakenly believe that if they don’t hear from the FTB within 12 months, they’re clear. Wrong. The FTB commonly issues assessments 2-3 years after filing, especially for complex real estate transactions requiring detailed review.

During this window, interest compounds daily on unpaid taxes. By the time you receive the notice, your $266,000 tax bill has grown to $305,000 or more with accumulated interest. Don’t gamble with FTB enforcement timelines. If you attempted a 1031 exchange after the ban took effect, file an amended California return immediately and work with a tax professional to minimize penalties through voluntary disclosure.

Do I Need to Report My Portfolio Size to the FTB?

Currently, California doesn’t require specific disclosure of single-family home counts on tax returns. However, the FTB can determine your portfolio size through:

• Schedule E property listings across multiple years
• Property tax records cross-referenced with your EIN
• Qualified Intermediary reporting of 1031 exchanges
• Third-party information returns from property managers

If you’re borderline (48-52 properties), document your exact count with property lists, acquisition dates, and entity ownership structures. If the FTB challenges your 1031 exchange, you’ll need contemporaneous records proving you were below the 50-property threshold at the time of sale.

Book Your California Real Estate Tax Strategy Session

AB 1611 just rewrote the playbook for California real estate investors. If you own 40+ properties, are planning major portfolio moves in 2026, or want to understand how the corporate homebuying ban affects your specific situation, don’t wait for an FTB notice to take action. Our real estate tax team has saved California investors over $12 million in combined capital gains taxes through strategic entity structuring, advanced depreciation strategies, and multi-jurisdictional tax planning. Book your personalized consultation now and get a clear roadmap for maximizing tax savings under California’s new rules.