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Steve Sims, Taxpayers' Rights Advocate.

California’s New Reporting Requirements for Certain 1031 Exchanges

A number of practitioners have contacted us about Assembly Bill 92 which became law on June 27, 2013. Specifically, I have heard concerns about the new requirements under Revenue and Taxation Code sections 18032 and 24953. Each section states if a gain or loss from the exchange of property in this state is deferred under Section 1031 of the Internal Revenue Code (IRC), and the property acquired in that exchange is located outside of California, the taxpayer shall file an information return with the Franchise Tax Board for the taxable year of the exchange and for each subsequent taxable year in which the gain or loss from that exchange has not been recognized.  If the required reporting is not done, then the deferred gain is accelerated, regardless of whether the replacement property has been sold. This new law applies to exchanges of property that occur in taxable years beginning on or after January 1, 2014. I have received questions as to whether or not this applies to California residents, if it applies to both individuals and business, and of course will a draft copy of the information return form be available soon?

Currently, we have begun planning the format for reporting exchange transactions that occur in 2014 which require disclosure. We anticipate that an implementation team will issue instructions in the spring to answer your questions in time for the first information returns, which will be due in the 2015 filing season. For taxpayers that fail to comply with the reporting requirement and fail to file a return, the FTB could make an estimate of the net income from the exchange and may issue an assessment including tax, interest, and penalties due in the same manner as assessments that are proposed for the failure to file a return.

Look for a future article this spring in Tax News on this issue.

Steve Sims, EA
Taxpayers' Rights Advocate

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