California Requires Annual Reporting On Out-Of-State Properties Exchanged For California Properties in 1031 Exchanges

Assembly Bill 92, codified in California Revenue and Taxation Codes Sections 18032 and 24953, requires that beginning on January 1, 2014, taxpayers who exchange real property in California for real property outside of the state must file an annual report with the California Franchise Tax Board (“FTB”).  This requirement applies for individual and corporate taxpayers and applies whether or not the taxpayer is a California resident.
California’s position is that gain deferred from the sale of the California property for a property outside the state, pursuant to an IRS 1031 Exchange, is subject to California taxes and the taxes must be paid when that gain is realized by the sale of the out-of-state property.  For instance, if a taxpayer sells a property in Los Angeles and defers their gain from the sale of that property by purchasing a property in New York when the taxpayer sells the property in New York, the taxpayer is subject to California income tax for the gain which was made, but deferred, from the sale of the property in California, by the purchase of the property in New York.

Prior to the enactment of Assembly Bill 92, California did not have a mechanism to track deferred gains or loss for taxpayers who did not file California tax returns, either because the taxpayer had moved out of state and/or the exchanged properties were located outside of California.  However, beginning in 2014, taxpayers who have exchanged California property for properties outside the state are required to file a report for the tax year in which the exchange occurs and for each subsequent tax year.   The penalty for failing to file the required report may be an assessment of net income tax by the FTB, which may estimate the income derived from the sale of the California property, based on any information available to it, plus interest and penalties.

“This information is for educational purposes only and not intended to constitute legal advice. Every project and property is unique. Please seek legal counsel for advice specific to your project.”