California Assembly Bill 92 imposes the new reporting requirements for exchanges of property occurring in tax years beginning on or after January 1, 2014.
Taxpayers holding California properties and considering a section 1031 exchange involving their California properties may want to accelerate these like-kind exchange transactions into 2013.
California law conforms to the federal treatment of qualified IRC section 1031 like-kind exchanges, including transactions in which taxpayers exchange California property for out-of-state property.
The position of the California Franchise Tax Board (FTB), however, is that gain or loss from the exchange of property located in California is California-sourced income that must be reported to the FTB when the gain or loss is ultimately recognized (i.e., when the replacement property is subsequently sold).
This rule applies regardless of whether the taxpayer is residing in or doing business in California at the time the gain is recognized.
The FTB has a long history of addressing perceived noncompliance with this rule and of tracking deferred gains or losses of taxpayers that are no longer filing California returns. For instance, last year, the FTB announced that IRC section 1031 exchanges would continue to be a “top” audit issue. The FTB indicated that one common issue involves taxpayers not sourcing gains to California upon disposition of replacement property.
New reporting requirement enacted
To assist the FTB with tracking deferred gains and losses, the recently enacted legislation (Assembly Bill 92) adopts new information reporting requirements for taxpayers that defer gain or loss in IRC section 1031 exchanges when California property is exchanged for out-of-state property.
Taxpayers will be required to file an information return with the FTB in the tax year in which the exchange occurs and for each subsequent tax year in which the gain or loss is not recognized.
If a taxpayer fails to file the required information return, the FTB may estimate the net income due on the exchange from any information available and assess tax, penalties, and interest.
The new reporting requirement applies to exchanges of property occurring in tax years beginning on or after January 1, 2014.
For more information, contact a KPMG tax professional: