updated May 2020
California “Clawback” in Full Effect Starting in January 2014
If you own California real estate and are planning on deferring taxes when you sell your investment by purchasing property in another State via a 1031 Exchange, be aware that California will soon be tracking your future real estate transactions to determine if, at some point, you owe California previously deferred State taxes.
Over the past few years there has been an increase in the number of investors who have looked to minimize their exposure to the steep tax rates that the State of California has imposed. Many investors have utilized 1031 Exchanges to move their investments, tax deferred, out of California and into States with no State taxes or more favorable tax rates. At a future date some investors will sell these new “non-California” properties and choose to take their profits rather than participating in another 1031 exchange. These investors, of course, anticipate paying Federal Capital Gains Tax, Depreciation Recapture and Healthcare Surtax on their profits, but what about the State of California tax that was originally deferred?
Recently, the State of California Assembly passed a Bill which added new sections to the California Tax & Revenue Code. These sections provide that taxpayers in a 1031 Exchange that sell California Property and purchase NON-California Replacement Property will be required to file an annual information return with the
California Franchise Tax Board (FTB), reporting this NON-California property. The California State taxes that were previously deferred will be due when and if taxpayers sell their new properties and elect to take their profits rather than continuing to defer taxes through another 1031 Exchange. If taxpayers fail to file the annual return, the FTB may estimate taxes due and assess tax, interest and penalties. The new law shall apply to exchanges of property that occur in taxable years beginning on or after January 1, 2014. Read the text of Assembly new Bill here.
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