Do You Need California State Taxes on Exchange 1031?

Do You Need California State Taxes on Exchange 1031?

An exchange allows a 1031 real estate investor to sell a property without having to pay the profit tax, and buy another with the proceeds. Most states that impose income tax honor the effect of trading by relieving 1031 investors of their tax debt from the state as well. California is one of those states.

IRS Regulation

An exchange of 1031, so named for the Internal Revenue Code that defines the process, occurs when one owner reinvests the proceeds from the sale of the sale of a rental property into the purchase of another rental property. The product must be held by a qualified intermediary – who is a person or an unrelated business – and specific deadlines for the identification and purchase of the replacement property are met. In a 1031 exchange, profits from the sale are not taxed until the replacement property is sold. An exchange can be done 1031 countless times, however. If the replacement property is itself sold in an exchange of 1031, and each subsequent sale is effected by means of an exchange of 1031, the tax is deferred indefinitely no.

California Regulation

Normally, according to the California Franchise Tax Commission, 3,333 percent of the sale price or 9.3 percent of the profit is withheld by an investor when selling real estate in California. The board provides an exception, however, for owners who can attest that the transfer is part of a 1031 exchange, as defined by the Internal Revenue Code, because the sales associated with an exchange are not submitted 1031 to California tax.

In California, however, you are not taxed on the sale of a 1031 property, according to William Exeter, president of Exeter 1031 Exchange Services. But if you sell a property and use a 1031 Exchange Rules to buy property in another state, you must pay the tax on the portion of the tax associated with California property when you sell the property in the other state.

2010 Proposed Prohibition California

In response to a disastrous budget situation, in 2010, the California legislature considered removing the exemption from California’s 1031 tax regulations. AB 2640 originally included language selling a property associated with a fully taxable 1031. On its second reading, this language was removed from the bill, to the effect that the exchanges are still 1031 honored under tax law in California.

What is happening in Other States?

Some states, like Texas, do not have state income tax. In these states do not trigger a state tax, or sales 1031 regular exchanges. However, there may be exceptions to this rule. For example, if a limited liability company makes an exchange of 1031 in that state, a tax on the gross receipts will be due on sale. In states that impose an income tax, trading rules vary 1031. In Mississippi, Oregon and Vermont, for example, to defer property tax, property sold and purchased must be located in the state. Pennsylvania is the only state that does not recognize any exchange.