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?