New Rules for 1031 Exchanges

There are new annual filing requirements for taxpayers who use Internal Revenue Code (IRC) Section 1031 to defer gain or loss when selling California property. Assembly Bill 92 (AB 92) added California Revenue and Taxation Code Sections 18032 and 24953 creating new annual filing requirements for taxpayers who exchange California relinquished properties for like-kind, non-California replacement properties under IRC Section 1031.

 

Effective January 1, 2014, all taxpayers who defer gain or loss under IRC Section 1031 (1031-exchanges) by selling California relinquished properties (CA RQs) and acquiring like-kind, non-California replacement properties (Non-CA RPs) will have to file a new information return (California 1031 information return) to track their deferred California sourced gain or loss. This California 1031 information return will generally be required to be filed annually until the deferred California source gain is recognized. The new California 1031 information return is currently being developed.

 

California’s new law will help taxpayers and the Franchise Tax Board (FTB) keep track of California sourced gain deferrals from 1031-exchanges. After exchanging CA RQs for Non-CA RPs, many taxpayers later sell their Non-CA RPs and their previously deferred California sourced gain is not reported to California. Here is an example of how this California source deferred gain is determined…..