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?

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