Friday
Jan272012
Friday, January 27, 2012 at 12:08PM | Staff 1031 Exchanges Remain California FTB Audit Target
Section 1031 Tax Deferred Exchanges (commonly referred to as 1031 Exchanges, Tax Deferred Exchanges or Like Kind Exchanges) continue to be one of the California Franchise Tax Board's ("California FTB") top audit concerns as announced by the California FTB in its January 2012 issue of Tax News.
The California FTB provided further guidance regarding the top audit findings involving 1031 Exchange transactions, which included:
- Capital gains not being properly recognized and taxed in the State of California when the non-California replacement property acquired as part of the 1031 Exchange is ultimately sold;
- Taxpayer fails to report other property (boot) received in the 1031 Exchange;
- Taxpayer does not meet identification or other technical requirements of the 1031 Exchange;
- Relinquished and/or replacement property are not held for investment or for productive use in a trade or business (i.e., property is used for personal purposes or is held primarily for sale); and
- The taxpayer who transfers relinquished property is a different taxpayer than the party who acquires replacement property (see article on Is Your LLC Really a Single Member LLC?).
Non-California Replacement Property Acquired in 1031 Exchange
The majority of the audit issues mentioned above are certainly not surprising. 1031 Exchanges are complex tax-deferred transactions and can be very confusing to deal with. However, investors should take careful note of the first audit concern mentioned.
California has always taken the position that investors owe capital gain taxes to California when they sell non-California property that was acquired as part of a prior 1031 Exchange starting with the sale of California property. In other words, you can not sell California real estate and acquire non-California real estate through a tax-deferred exchange in order to avoid California capital gain taxes.
