Annual Reporting Requirements for Exchanges Involving Non-California Replacement Property

Real estate investors and professionals take note: as a seller subject to California’s income tax laws, the California legislature instituted reporting requirements for parties you exchange California property under IRC Section 1031 for non-California replacement property. 

 California Assembly Bill 92 added sections 18032 and 24953, requires sellers to files an additional California 1031 Information Return when selling California properties when acquiring like-kind out of state properties-referred to as “Non-CA RPs.” According to the Franchise Tax Board, the new law will help “taxpayers and the FTB keep track of California sourced gain deferrals form 1031 exchanges,” using the following example from the as an application of the law: 

John sold a California Relinquished Property (RQ) on February 19, 2016, for $4,500 as part of a 1031- exchange. John’s basis in the CA RQ was $1,000. John realized a $3,500 gain on the sale of her CA RQ. Sue acquires a Non-CA Replacement Property (RP) at a total purchase price of $5,000. Assuming there was no other property (boot), John can defer his California sourced gain of $3,500; but, under the new California law, John must also annually report his $3,500 deferred California sourced gain on a new California 1031 information return. 

All taxpayer types from individuals to business entities are required to comply with the news statute for any transactions starting with the 2014 Tax year, filing the California 1031 Information Return form as an attachment with their normal FTB filing. 

This addition to California’s tax code is not a surprise, given the current momentum to find more revenue for the state. For example, a real estate investor sells retail strip mall in Los Angeles, California and buy a similar property in Bend, Oregon. Prior to 2014 he met all of the federal 1031 requirements, both federal and California taxes could be deferred until the Oregon property was sold. Unfortunately, California was duea portion of those deferred taxes and the state had no system in place to monitor these transactions. A new rule now provides the FTB with the tools necessary to oversee these transactions to collect deferred taxes at the appropriate time. 

With the implications of new capital gains concerns, Peak 1031 Exchange, Inc. is diligently working on the behalf of investors to not only ensure compliance with tax codes on both the state and national level but to find the maximum tax deferral advantage possible during a like-kind exchange.