1031 Exchange Out Of California (Clawback Laws)

[Robert C.]

Hi,

I was wondering if anyone can tell me about their experiences moving money from California to another state via 1031 Exchange. I understand there were some clawback laws passed a few years back, so you eventually have to pay CA taxes plus reporting requirements.

Anyone done it? What do investors have to be aware of before considering moving their capital from the state? Is it a hassle? Any advice would be appreciated!

[Bill Exeter]

Hi @Robert C. and @James Kojo, 

You must file an annual information return (California Franchise Tax Board Form 3840) in order to report the status of the property to California each year.  California will guestimate the amount of tax that you owe if you fail to file CA FTB Form 3840 and then you would do battle with the FTB (which is not something that you want to do).  

You would compute the amount of taxes that you owe in California, but you will also get a "foreign tax credit" for the amount of taxes that you pay in the other state so that you are not being "double taxed and you would owe tax to California only on the amount of taxable gain while you were invested in California.  

You can, of course, continue to 1031 Exchange until you die and then your heirs will receive a step-up in cost basis.