Friday, November 1, 2013

New Legislation: Assembly Bill 92 will affect investors doing 1031 Exchanges and purchasing property in other states...

Are you an investor looking to do a tax deferred 1031 Exchange for a property in the state of CA for a property outside of the state of CA? Read on...

Thanks to California Assembly Bill 92, starting January 1, 2014 if a taxpayer who sells an investment property in California and purchases via a 1031 Exchange a "like-kind" investment property located outside of California, that taxpayer must file an "information return" with the CA Franchise Tax Board (FTB) for that taxable year and every year thereafter in which the gain or less from the exchange has not been recognized. If a taxpayer fails to file such information return and tax returns, the FTB may propose to assess the amount of tax, interest and penalties due by estimating net income from any available information, including the amount of gain.

Essentially what the state of California is trying to do is be sure to collect any tax owed in the future. If an investor does a 1031 Exchange, tax on any gain from the sale of the property is merely deferred. Tax will still be owed at some point in the future, and the state wants to make sure it is in a position to collect it.

So, you should ALWAYS consult a CPA or qualified tax professional before engaging in something like a 1031 Exchange, and if you are considering purchasing a replacement property outside of California, you will need to be sure to comply with this new law. I wonder if the burden of doing this year after year will be worth the tax deferment for state tax?

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