California Proposes to Eliminate 1031 Exchange Tax Benefits

In the midst of the worst real estate market in decades, bureaucrats in California have decided to make life in the Golden State even harder for real estate investors and professionals.

The California Legislative Analyst’s Office (CLAO) has recommended that property located outside California no longer receive the deferral of capital gains taxes offered by Section 1031.

California currently follows federal law regarding 1031 exchanges, permiting investors to exchange business or investment property for property of a like kind without paying state capital gains that might have accrued on the first property.

Under the new proposal, California would eliminate the tax exclusion for capital gains on like–kind exchanges involving out–of–state commercial property.

The reason CLAO gives for their proposal is that once the in-state asset is swapped for an out-of-state asset, the state losses all the gain since the owners will not report it.

The CLAO estimates that the state could gain revenue of approximately $25 million in 2008-2009 and $50 million in 2009-2010.

So, drowning under mountains of debt and overspending, California decides to go after its faltering real estate industry to help make up the shortfall.

CLAO’s argument in favor of eliminating deferral of state capital gains taxes for 1031 exchanges is specious at best. 

The Tenant-in-Common Association (TICA) has opposed the CLAO proposal.

We look forward to TICA mustering the facts and figures to blow it out of the water. 

If you would like more information or have questions or comments, you should contact Greg Ellis of TICA at gellis@ticassoc.org or 317.663.4176.

So far, no legislator has gone on the record in favor of the CLAO proposal.  We think it should stay that way.

Now is not the time to place greater burdens on the California real estate market.

To contact Melissa J. Fox about serving as a qualified intermediary or for other 1031 exchange services, send an email to strategicfox@gmail.com

 

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