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New California 1031 Exchange Law – Effective January 1, 2014

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Source: Old Republic Title Company – Nancy Rench, Vice President, Area Manager Orange County

Annual Filing Requirement

Effective January 1, 2014, all taxpayers – resident or non-resident – who sell California property in a 1031 exchange and purchase replacement property located outside of California will be required to report this annually to the California Franchise Tax Board.

In June of this year, the Legislature passed Assembly Bill 92 (AB 92) which added California Revenue and Taxation Code Sections 18032 and 24953 creating the new annual filing requirement.

With this new law, the Franchise Tax Board (FTB) will be able to track California sourced gain from 1031 exchanges.Generally, taxes deferred in a 1031 exchange are due at a future date when the newly acquired replacement property is sold. However, if the replacement property is located out of state, there is no tracking mechanism and the State of California loses that tax revenue.

Essentially, the new “1031 Information Return” must be filed annually until the deferred gain is recognized – i.e. the property is sold without another 1031 exchange.

For taxpayers who are already required to file a California tax return, the new “1031 Information Return” will be filed as an attachment to the taxpayer’s California tax return.  For taxpayers who are not already required to file a California return, the new “1031 information Return” will be due on the same date that a California return would be due if they were required to file a California return.

The new filing requirement applies to all individuals, limited and general partnerships, estates, trusts, limited liability companies, limited liability partnerships, and all franchise or income tax paying corporations regardless of their residency status or commercial domicile.  The Franchise Tax Board will be establishing guidelines, procedures, and standards for implementing the new law.

The new California 1031 information return is currently being developed by the Franchise Tax Board. For more information on the new filing requirement please visit

https://www.ftb.ca.gov/professionals/taxnews/2013/November/November_2013.pdf

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