January 2, 2014–San Diego, California–Exeter 1031 Exchange Services, LLC reminded real estate investors today that the State of California has finally inserted a “claw” into the California Claw-Back Requirement.
California Claw-Back Provision
California has historically taken the position that any capital gain earned on California real estate should be subject to California tax upon the ultimate sale of the real property even if the investor had sold his or her California real estate and subsequently 1031 Exchanged into investment property located outside of California. In other words, they 1031 Exchanged out of California real estate and into non-California real estate. This has been named the “California Claw-Back.” 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 Passes Legislation
The California State Assembly recently enacted legislation that now requires investors who complete a 1031 Exchange transaction where they sell California real estate and buy non-California real estate as their replacement property (i.e. they exchanged out of California investment real estate into non-California investment real estate) to file an annual information return with the California Franchise Tax Board (FTB), reporting their exchange into non-California real property. The FTB now has a mechanism for tracking these transactions and ultimately enforcing its claw-back provision.
New Law Effective January 1, 2014
The new law applies to any 1031 Exchanges of real property that close in any tax year beginning on or after January 1, 2014 (i.e. after December 31, 2013).
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