California Special Rule For 1031 Exchanges

Those of you out there who think Section 1031 solves all problems (Federal as well as state) should not lose sight of California’s requirements.

Recall that this section of the Internal Revenue Code permits a bloke (who dots all of the i’s and crosses all of the t’s) to dispose of his investment real estate, replace the old property generally with property of equal or greater value, and thus defer current recognition of the gain on the sale.  And California has long observed generally the same rules.

But over time, folks who disposed of California based realty and replaced it with other realty out of state have forever more escaped California tax when they later (in some cases, many years later) disposed of the replacement property in a fully taxable transaction.  California has always considered such a sequence of events as eventually resulting in the downstream payment of the California tax, but in most cases, taxpayers have “forgotten” to file and pay accordingly.  That’s just the practicality of what has happened in many cases – not the “right” thing to do, but nevertheless the practical reality.  California has finally caught on.

Until relatively recently, the state had no practical way of tracking the subsequent sale of property located outside of California – especially in cases of taxpayers who, perhaps legitimately, had long since stopped filing California returns.  But the California legislature has now added revenue and taxation code provisions which require specific reporting for those taxpayers who exchange California property for non-California replacement property.  And yes, California has a specific tax form for this purpose.

And for those of you who drive a car, do the good state of Oregon Revenooers have a deal for you!

Starting July 1, up to 5,000 volunteers will have the wonderful opportunity to sign up to drive with some sort of computer in your rig which will collect data on how much you drive and where!  The volunteers will agree to pay 1.5 cents per mile traveled on public roads, as opposed to the gas tax automatically passed on when a body fills up his tank.

And if this flies, get ready for the same opportunity to come to a state near you:  last year, California created a committee to study alternatives to the gas tax and design a pilot program.  And My Way News reports that the great state of Washington as well as Indiana will develop similar programs.

Here’s where it gets interesting – the Oregon program provides that because volunteers will still be paying the gas tax when they fill up, some fancy rules will be put in place to enable them to somehow get a credit or rebate so they’re not double taxed.  (Sound like a bureaucracy waiting to happen?)

And how long do you think it will take before drivers’ habits find their way into other snoopers’ data bases, for use in selling advertising and any number of other fine products?

George Orwell – where are you now?

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a stockholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He can be reached at 831-7288, and welcomes comments at [email protected].

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