Deferred Gains and Losses (Like-kind exchanges IRC 1031)
A gain or loss from the sale or exchange of real or tangible personal property located in California is sourced to California at the time the gain or loss is realized. The TCJA limited the type of property eligible for tax deferral under IRC Sec 1031 to real property only, effective for exchanges after 2017. This TCJA provision was adopted by California in AB 91 (signed by the governor 6/27/2019), with two significant differences: the provision only applies to taxpayers with AGI of $500,000 or more ($250,000 for those filing single or married separate) and only applies to exchanges completed after January 10, 2019.
Non-resident - California Property - If a taxpayer is a non-resident and exchanges real or tangible property located within California for real or tangible property located outside California, the realized gain or loss will be sourced to California. Tax will not be imposed until the gain or loss is recognized.
“ Example: As a resident of Texas, Mr. Round Tax exchanged a condominium located in California for like kind property located in Texas. Mr. Round Tax realized a gain of $15,000 on the exchange that was properly deferred under IRC section 1031. He then sold the Texas property in a non-deferred transaction three years later and recognized a gain of $20,000. Determination: The $15,000 deferred gain (the lesser of the deferred gain or the gain recognized at the time he disposed of the Texas property) has a source in California and is taxable by California. ”
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Non-resident – Out-of-State Property - If a taxpayer exchanges real or tangible property located outside California for real or tangible property located within California, the gain recognized when the California property is sold or otherwise disposed of in a non-deferred transaction has a California source and is taxable by California.
“ Example: As a resident of Nevada, in 2018 the taxpayer exchanged Nevada business property for like kind California business property. The taxpayer realized a $10,000 gain on the exchange that was properly deferred under IRC section 1031. A few years later, and while still a Nevada resident, he sold the California business property in a non-deferred transaction and recognized a gain of $50,000.Determination: Because the property is located in California, the $50,000 gain has a California source and is taxable by California. ”
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Sec 1031 Annual Reporting Requirement for Some 1031 Exchanges - Beginning with Sec. 1031 exchanges occurring on or after January 1, 2014, taxpayers who exchange California real property for like-kind property located out of state will be required to file an information return (FTB 3840) with the FTB for the sale year and each subsequent year the gain is deferred. (New R&TC §§18032, 24953 added by AB 92)