Originally published in 2015. Additional material added in 2019.
Curious what a 1031 Exchange is all about? It is a great tool for investors! Find out the general details and California specifics below!
A 1031 exchange, also known as a like-kind exchange, allows you to roll over your capital from the property you have sold to the property you have recently purchased. The idea is that you would be able to avoid taxes until you sold your properties for cash at some later date, and ideally save some money by paying only one long-term capital gains tax. Even if your goals are not long-term but you are looking to save some money now, there is no limit to how often you can use a 1031 exchange, and paying little to no taxes with this type of transaction may seem mighty attractive.
There are two basic guidelines that apply to most cases.
Along with these requirements, there are two timelines to keep in mind while processing a 1031 exchange.
There are no extensions available, and if the required transactions are not completed within the number of days given, you will have to pay taxes on your sold property.
California Specific Laws:
Over the past year, several Tax News articles have provided taxpayers and representatives important information relating to the new IRC Section 1031 filing requirement for California. The Tax News article in November 2014 summarized who must file, where to file and when to file. The article also provided a draft copy of the form FTB 3840 asking for your feedback. We now have the final California Form FTB 3840, which will be available for download and to file as required for the 2014 taxable year. For your convenience, here is the link to the new Form FTB 3840.
California's Clawback Rule
California recently modified their claw-back rule to require that if you exchange out of state on or after January 1, 2014, you must file an annual information return with California reporting the status of your nonCalifornia replacement property. If you don’t file the annual return, the state will estimate the amount of tax you owe on your California gain, and send you a bill.
Huggins Homes 2019 Note:
One interesting fact I learned during my education on this topic, is that "like-kind" refers to "an investment vehicle" and not "the same type of investment vehicle." It's actually a VERY common misconception that if you sell a single family rental that you must buy another single family rental. That's simply NOT the case! What I was taught was that an investor can sell their single family rental property and instead of only being able to buy another single family rental, they could actually use the money to purchase a commercial building, a 2-4 multi-family property (duplex, triplex, quad-plex.), an apartment building or even certain qualifying stocks! Additionally, the exchange doesn't have to be limited to only one type of new investment vehicle. You could sell a single family rental and use the money to purchase a duplex and a commercial building! The possibilities are really nearly limitless once you update your definition of "like-kind investment vehicle."
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