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California Proposes To Limit 1031 Exchange Like-Kind Property

By Bill Exeter

Services for Real Estate Pros with Exeter 1031 Exchange Services, LLC President & CEO

March 27, 2008 05:16 PM

California Proposes to Limit 1031 Exchange Like-Kind Property

The California Legislative Analyst's Office (LAO) has issued a proposed change to California's treatment of tax deferred exchanges. The proposed change would disallow tax deferred exchanges of California real property into out-of-state "commercial" property (commercial property is not adequately defined at this point in time).

Federal Taxes Deferred; California Taxes Would Be Recognized

This proposed change would mean that an investor could still complete a tax deferred exchange and the Federal income tax consequences would continue to be tax deferred, but any California state income taxes would be realized and recognized unless the like-kind replacement property was also acquired within the state of California.

We will provide you with updated information as it becomes available.

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The TaxMan

Self Employed - Oakland, CA

That sucks...

We all know how California LOVES our tax money...

Mar 28, 2008 06:18 AM

Bill Exeter

Exeter 1031 Exchange Services, LLC - San Diego, CA

1031 Tax-Deferred Exchange Expert

You are so right.

California's position is wrong on so many levels. I personally think that it will result in a decrease in real estate activity because investors will not want to sell and then buy in California, so they will just not sell at all, which in turn means less Realtor commissions, fewer escrow transactions, fewer title insurance business, etc., etc.

Time will tell.

Mar 28, 2008 06:46 AM

Ken Tharp

Iowa Equity Exchange - West Des Moines, IA

Section 1031 Exchanges, Iowa/U.S.

Hi Bill,

Further evidence of the short-sightedness of the legislative body. I think your analysis is spot-on. I don't see how it could help but result in a decrease in activity.

What is the likelihood of passage?

Ken Tharp, Iowa Equity Exchange

Mar 29, 2008 02:36 PM

Anonymous

Mike Peabody

I realize that other states have implemented similar laws, but couldn't this be fought as a violation of the Commerce Clause? It certainly seems like economic protectionism through taxation.

Jun 27, 2008 08:26 AM

Hi Ken, You are so right. It appears to be a legislative analyst looking for revenue raising that does not really understand the "big picture." It does not appear that it will go anywhere, so I think we are in really good shape. It would absolutely result in decreased activity, and would then snowball into fewer broker commissions, fewer escrow fees, fewer title insurance premiums, fewer appraisals, etc. Thanks for commenting.

Jun 27, 2008 09:20 AM

California Proposes To Limit 1031 Exchange Like-Kind Property

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