California Issues Reporting Requirements for California 1031 Exchanges
California real estate investors and Realtors need to be aware of new California Like-Kind Exchange reporting requirements. California's Franchise Tax Board released its newly designed FTB Form 3840 for reporting California like-Kind Exchange transactions.
Exeter 1031 Exchange Services, LLC is advising its clients and their Realtors of new reporting requirements issued by the California Franchise Tax Board ("FTB") this summer. These new California 1031 Exchange reporting requirements impacts investors when they sell relinquished property located within the state of California borders and subsequently reinvest through a 1031 Exchange by acquiring replacement property located outside of the state of California.
California Claw-Back Requirement
The State of California has historically taken the position that any capital gain earned or accrued on California real estate is subject to California tax upon the ultimate sale of the real estate. This applies even if the investor sells the California real estate and subsequently 1031 Exchanges into investment property located outside of California. That is, they 1031 Exchange out of California real estate and into non-California real estate and then subsequently sell the replacement property at a later date and do not structure a subsequent 1031 Exchange transaction.
California's position of taxing future capital gains resulting from the sale of non-California real estate has been nicknamed the "California Claw-Back Provision." However, there had not been any mechanism for tracking the subject real estate in order to enforce the California Claw-Back Provision – until now.
California State Assembly Enacts Legislation
The California State Assembly signed legislation into law that requires investors who complete a 1031 Exchange transaction by selling real estate within the borders of the state of California and subsequently buying real estate outside of the borders of the state of California as their replacement property to file an annual information return with the California Franchise Tax Board ("FTB"). Investors, each and every year following their 1031 Exchange out of the state of California, must file an information return on the California Like-Kind Exchange transaction.
California Franchise Tax Board Issues FTB Form 3840
The new California FTB Form 3840 will be required for taxpayers who complete a 1031 Exchange any time after December 31, 2013, when they sell relinquished property located within the state of California and subsequently purchase replacement property located outside of the state of California. The new law applies to any 1031 Exchange transaction that closes in any tax year beginning on or after January 1, 2014.