How California Investors Can Buy Connecticut Real Estate Tax-Free

By Steve Schappert | Connecticut Real Estate Brokerage LLC

If you’re a real estate investor in California eyeing investment opportunities in Connecticut, a 1031 exchange might be your most powerful tax-saving tool. Used wisely, this IRS-backed strategy allows you to defer capital gains taxes while expanding or diversifying your real estate portfolio—without losing your profits to taxes.

In this definitive guide, we’ll walk you through everything you need to know about how to use a 1031 exchange to invest in Connecticut from California—and what pitfalls to avoid along the way.

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🔁 What Is a 1031 Exchange?

Under Section 1031 of the IRS tax code, real estate investors can defer paying capital gains taxes when they sell one investment property and reinvest the proceeds into another “like-kind” property. This tool is especially valuable for:

• Preserving equity

• Scaling your portfolio

• Diversifying into new markets (like Connecticut!)

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🌍 Can I Exchange Across State Lines?

Yes! You can sell property in California and purchase replacement property in Connecticut—or any other U.S. state—so long as both properties are:

• Held for investment or business use, and

• Of like-kind (most real estate qualifies)

📌 Pro Tip: Residential rental, commercial, industrial, land, or multifamily properties all count as like-kind.

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⏱ 1031 Exchange Deadlines: Don’t Miss These

To successfully complete a 1031 exchange, timing is everything:

Both deadlines start from the date you close on the property you’re selling.

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🧾 You Must Use a Qualified Intermediary (QI)

You are not allowed to touch the proceeds from the sale. Doing so will invalidate your exchange.

Instead, the funds must be held by a Qualified Intermediary, or QI, who:

• Prepares all legal exchange documents

• Holds the sale proceeds in escrow

• Facilitates the purchase of the new property

✅ Choose a QI with experience in cross-state exchanges and IRS compliance.

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⚠️ The California “Clawback” Rule

Here’s what many investors miss: California wants its capital gains tax—eventually.

If your client sells a California property and exchanges into a Connecticut property, California will track the deferred gain and try to collect taxes if the Connecticut property is sold later (even if you’re no longer a CA resident).

To comply:

• File CA Form 3840 annually until the gain is realized or permanently deferred again.

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🏘 What Types of Properties Qualify?

✅ Eligible:

• Single-family rental homes

• Apartment buildings

• Office space

• Retail centers

• Land held for investment

• Industrial properties

🚫 Not Eligible:

• Primary residences

• Second homes or vacation homes

• Fix-and-flips (unless held for investment)

📍 In Connecticut, your client should rent out the property or operate a business in it to maintain eligibility.

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🔎 Identification Rules: Know Your 3 Options

Your client must identify potential properties to the QI within 45 days. The IRS allows:

1. 3-Property Rule

Name up to 3 properties regardless of value.

2. 200% Rule

Identify more than 3 properties as long as their total fair market value is no more than 200% of the property sold.

3. 95% Rule

Identify any number of properties—but you must close on at least 95% of the total identified value.

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📝 Contract Language for 1031 Exchanges

To protect your client’s interests, always include a clause in the purchase and sale agreement such as:

“Buyer intends to complete this transaction as part of a tax-deferred exchange under IRC Section 1031. Seller agrees to cooperate with Buyer to facilitate the exchange at no additional cost or liability to Seller.”

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👣 Step-by-Step: 1031 Exchange Process

1. Hire a Qualified Intermediary before selling

2. List and sell the California property

3. Identify replacement properties in Connecticut within 45 days

4. Work with a Connecticut real estate professional to evaluate and inspect options

5. Close within 180 days on the selected property

6. File necessary forms in both states

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💡 Real Estate Tip from Steve Schappert

“1031 exchanges are about long-term vision. My clients aren’t just deferring taxes—they’re building generational wealth. Connecticut offers stable prices, strong rental demand, and a wide range of eligible investment properties that pair perfectly with California equity.”

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🏆 Why Connecticut?

As a California investor, here’s what makes Connecticut especially attractive:

• Lower entry price points than major CA cities

• Strong rental demand near universities and hospitals

• Opportunity zones in cities like New Haven, Hartford, and Bridgeport

• Stable cap rates and less competition

We help our clients:

• Identify cash-flowing multi-family buildings

• Connect with local contractors for renovations

• Arrange management and tenant placement

• Structure deals with financing and legal support

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✅ Summary: What You Need to Know

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📞 Ready to Exchange?

If you’re a California investor looking to buy in Connecticut, we can help guide you through:

• Property selection

• Exchange compliance

• Local contractor and management introductions

• Ongoing asset performance tracking

👉 Contact Steve Schappert at Connecticut Real Estate Brokerage LLC
📱 Text: 203-994-3950
📧 Email: [email protected]
🌐 Website: ConnecticutRealEstate.online

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✅ When a California Client Should Hire a CA Attorney

1. To Comply with California’s Clawback Rule

• A California attorney (or CPA) ensures the investor understands:

  • Form FTB 3840 annual filing requirements

  • How to properly track deferred gains

  • The risk of California taxing the deferred gain if the Connecticut property is sold later

2. If the Property Was Held in a California Entity

• Example: If the relinquished property is owned in a CA LLC, trust, or estate, then a CA attorney can:

  • Review entity structure and state-specific rules

  • Advise on continuity of title and ownership

  • Coordinate with CT counsel if restructuring is needed

3. For Estate or Community Property Planning

• Because CA is a community property state, how spouses or heirs are involved in the exchange may need state-specific review

• A CA attorney ensures that estate and tax planning remain compliant with CA law, even if the replacement asset is out-of-state

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⚖️ Connecticut Attorney’s Role

A Connecticut attorney will still be required for:

• Reviewing the purchase agreement

• Conducting title and lien searches

• Handling escrow/closing (especially if there’s no local title company)

• Ensuring Connecticut property meets investment-use standards for 1031 eligibility

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🤝 Recommended Approach

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💬 Final Thought

If the exchange involves high-value assets, trusts, or multiple properties, a California attorney (and CPA) can save your client thousands—or even millions—by proactively avoiding tax missteps.