Legal Alert: New 1031 Filing Requirements for California

California FTB Tax News No. 11/01/2013, 11/01/2013 Raines Feldman LLP
December 26, 2013

As a result of recent legislation, the Franchise Tax Board (FTB) has announced new annual filing requirements for taxpayers who exchange California relinquished properties for like-kind, non-California replacement properties under IRC §1031.

Effective January 1, 2014, all taxpayers who defer gain or loss under IRC §1031 (1031-exchanges) by selling California relinquished properties (CA RQs) and acquiring like-kind, non-California replacement properties (Non-CA RPs) will have to file a new information return (California 1031 information return) to track their deferred California sourced gain or loss. The new return is meant to help keep track of California sourced gain deferrals from 1031-exchanges, and will generally be required to be filed annually until the deferred California source gain is recognized.

Who must file: California's new filing requirement applies to all individuals, estates, and trusts, and all business entities regardless of their residency status or commercial domicile. For all exchanges of property that occur in taxable years beginning on or after January 1, 2014, and replaced with Non-CA RPs under IRC Section 1031, the seller/exchanger is required to file the new California 1031 information return regardless of whether they have any other California franchise tax, income tax, or information return filing requirement.

When to file: For taxpayers without a California franchise tax, income tax or information return filing requirement, the new California 1031 information return will be due on the same date that their California return would be due if they were required to file a California franchise tax, income tax, or information return. For taxpayers who do file a California franchise tax, income tax, or information return, the new California 1031 information return will be filed as an attachment to the taxpayer’s California franchise tax, income tax, or information return.

Where to file: For those taxpayers filing only the new California 1031 information return, FTB will provide a specific post office box address for submitting the new California 1031 information return. Taxpayers filing the California 1031 information return as an attachment to their California franchise tax, income tax, or information return will use the normal addresses for their particular return type.

Failure to file: For taxpayers who exchange CA RQs for Non-CA RPs and fail to file the new California 1031 information return, FTB may issue a Notice of Proposed Assessment to adjust their income for the previously deferred California sourced gain plus penalties and interest.

California's legislature gave FTB the authority to establish guidelines, procedures, and standards for implementing the new law. Stay tuned.

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