Starting in 2014, if you complete a 1031 exchange, and the property you relinquished was located in California while the property you acquired was located outside of California, you will have to file an annual report with the CA Franchise Tax Board. The new “California 1031 information return” reports your "California source" capital gains, so that the CA FTB can track the gain and make sure you pay taxes on it as soon as it is realized in a taxable event sometime after the exchange.
This new requirement by the state of California applies to all taxpayers, including natural persons, estates, trusts, and business entities, regardless of current state of residence or domestic jurisdiction, residency status, and whether a California tax filing would be otherwise be due. It applies to all 1031 exchanges that take place during taxable years beginning on or after January 1st, 2014 and will be included as an attachment to either a company’s franchise tax payment or Statement of Information (SOI), or individual’s income tax return. If it is a taxpayer’s sole filing, the California 1031 information return will be sent to a dedicated PO box.
If a taxpayer exchanges a California property for a non-California property and defers the recognition of capital gain under IRC section 1031, yet fails to file the new 1031 information return, the FTB may adjust that taxpayer’s income based on its own assessment of the capital gain.
The Franchise Tax Board will be releasing a draft of the new 1031 information return in the coming months before it is finalized.
