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Old 03-24-2016, 12:42 PM   #21
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More broadly, How are interstate 1031 exchanges handled against California and Georgia taxes ?
I researched this out of curiosity. Watch out this is a tax nightmare, California will get it's proportional share and the home state may get a full share increasing the total tax load. Can you say "Double taxation" . In addition California demands yearly reporting of the exchanged property's status.

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State of California Claw-Back Provision

The State of California's position has been that any capital gains accrued on California real estate will be subject to California tax upon the ultimate sale of the real property even if the investor had sold his or her California real estate and subsequently 1031 Exchanged into investment property located outside of California. This has become known as the California Claw-Back Provision.

For example:
Say Mr. Newcombe bought a property in CA for $100. After appreciating to $200, he exchanges it for one in ID. While in ID the property further appreciates to $400. Feeling he has had enough of owning property, he sells it for $400, showing a total capital gain of $300. Mr. Newcombe would not only be liable for $300 of capital gains taxes in ID, but $100 of capital gains taxes in CA as well.

Note: The reciprocal of this situation does not come into effect. If Mr. Newcombe owned property in ID and exchanged for property in CA, he would only be subject to CA state taxes, not those of ID.
From the above example it is clear that owning property in California and exchanging it for property in another state leaves one open to double taxation. There is no way to avoid this situation unless one stays out of CA entirely or performs the final sale there. Being taxed in CA would of course be undesirable because it has some of the highest income tax rates, 9.55% and 10.55% for earnings over $47,055 and $1,000,000 respectively.

The California Claw-Back Provision really hurts people when they try to exchange out of California's stringent tax system into a friendlier state tax system such as Nevada, Texas or Florida, which has no state income tax.
read more here:


http://www.exeter1031.com/article_ca...provision.aspx
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Old 03-24-2016, 12:58 PM   #22
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Yes, the annual filing requirement is the FTB 3840 that I was talking about. But it is just one form, not a full CA tax return.

However suppose in the year of sale, there are losses to offset. I presume in that year, I would have to file a full CA return, showing that the Schedule D from my federal returns has zero capital gains. I think this number will be transferred to the CA return.
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Old 03-24-2016, 01:10 PM   #23
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However suppose in the year of sale, there are losses to offset. I presume in that year, I would have to file a full CA return, showing that the Schedule D from my federal returns has zero capital gains. I think this number will be transferred to the CA return.
Are the off-setting losses from California income or from your home states income ? If they are not from California then I suspect they wouldn't be allowed.
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Old 03-24-2016, 01:17 PM   #24
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Are the off-setting losses from California income or from your home states income ? If they are not from California then I suspect they wouldn't be allowed.
In this scenario, it will be stock losses harvested while in the home state.
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Old 03-24-2016, 02:11 PM   #25
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Are the off-setting losses from California income or from your home states income ? If they are not from California then I suspect they wouldn't be allowed.
+1, unless you had included stock and related income, etc as California property the whole time (for example, in a California based brokerage account).

I think you're trying to hard to be too cute.
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Old 03-24-2016, 02:16 PM   #26
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+1, unless you had included stock and related income, etc as California property the whole time (for example, in a California based brokerage account).

I think you're trying to hard to be too cute.
Well, I am trying to figure out what best to do. It sure looks like it is best to have a clean cut -- sell the rental in the year of move, pay the tax and be done with the California's claws. Otherwise, I could be up for double state taxation when I sell the exchanged property in future.
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Old 03-24-2016, 02:36 PM   #27
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If you have any loser investments in your taxable portfolio you could sell those at a loss and reinvest in similar securities (being careful not to crease a wash sale) and then sell the rental and the investment losses would help offset the gain on the rental (both while you are a Ca resident for tax purposes).
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Old 03-24-2016, 02:52 PM   #28
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If you have any loser investments in your taxable portfolio you could sell those at a loss and reinvest in similar securities (being careful not to crease a wash sale) and then sell the rental and the investment losses would help offset the gain on the rental (both while you are a Ca resident for tax purposes).
Yes, I had diligently harvested losses during the Jan-Feb swoon. But not enough to offset the anticipated CG from the rental property sale.
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Old 03-24-2016, 05:18 PM   #29
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California taxes your California income as a percent of your total income. So for example, if all your labor and investments bring in $100k a year and $30k of that was from California, then you'll pay 30% of the income taxes for someone in California with a $100k income. If someone in California with a $100k income owes $6k, then you would owe 30% of that or ($1800) to California.

You'll need to file California form 540NR each year to California.
Most people living in another state would resent having to pay California state income taxes on income derived from inside that state. But it all depends on what the retal property is worth--and what it's going to be worth in the future. If the housing market has a long way to increase, keeping property there could still be a good investment despite taxes.

If I was going to leave a state, I would want to make a clean break and not pay 10% of gross rental receipts for a real estate management company to watch after my property.

The Hill Country of Texas is welcoming Californians with open arms, and lots of job talent is moving there in droves.
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Old 03-24-2016, 05:24 PM   #30
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Most people living in another state would resent having to pay California state income taxes on income derived from inside that state. ....
Why? Why would someone expect that they could in effect operate a business in another state and not have to pay state income tax to that state on the profits generated by the business? It seems naive that someone would think that they should not have to pay.
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Old 03-25-2016, 10:39 AM   #31
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Or I could do a 1031 exchange to rental properties in my new state to defer the tax. That is when I encounter the FTB 3840 annual filing requirement. You are required to report the status of the exchange to CA, every year, until the property is sold.
This is the info I was looking for on my CA rental I've owned for 26 years. You'd like to think you could exchange the property out of state (AZ in my case) and be done with CA. I wonder how'd they enforce the collection of this tax if the 3840 was never filed? I don't think CA has found a way to tax my stock/fund capital gains when after I move out of state.

Interesting that if I want to sell my rental, it is better to convert it to my primary residence for two years for tax purposes and just not live there but leave it vacant (it's not in the best area). The fed/state tax benefit far out weighs the after tax loss of revenue. Only depreciation would be recaptured. I'm just seeing how the math makes sense, not sure if it is fully viable.

Not wanting to pay CA taxes has become personal.
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Old 03-25-2016, 10:51 AM   #32
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This is the info I was looking for on my CA rental I've owned for 26 years. You'd like to think you could exchange the property out of state (AZ in my case) and be done with CA. I wonder how'd they enforce the collection of this tax if the 3840 was never filed? I don't think CA has found a way to tax my stock/fund capital gains when after I move out of state.

Interesting that if I want to sell my rental, it is better to convert it to my primary residence for two years for tax purposes and just not live there but leave it vacant (it's not in the best area). The fed/state tax benefit far out weighs the after tax loss of revenue. Only depreciation would be recaptured. I'm just seeing how the math makes sense, not sure if it is fully viable.

Not wanting to pay CA taxes has become personal.
You are lucky. I think the FTB 3840 is only for properties exchanged out of CA on or after 1/1/2014.

For the unlucky folks who exchanged after this date AND did not file the 3840, the FTB will send their regards to you in your new state with a Notice of Proposed Assessment that will adjust the taxpayer’s income to recognize the previously deferred gains, plus penalties and interest.
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Old 03-25-2016, 11:09 AM   #33
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Interesting that if I want to sell my rental, it is better to convert it to my primary residence for two years for tax purposes and just not live there but leave it vacant (it's not in the best area).
The concept of primary residence and "just not live there" are mutually exclusive. If you do what you propose you should know that you are committing fraud. Considering the penalties I suggest you either live there or pay the taxes.
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Old 03-25-2016, 11:29 AM   #34
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As I start to wade through the perpetual 1031 exchange mess with California even after I leave the state, I am thinking if it can be done in this way:

For federal taxes, I will go through a 1031 exchange to defer the capital gain taxes when I sell the rental in CA and move to GA. In addition to the regular CG tax rate, I will save on the 3.8% medicare surtax because of my income this year.

For CA state taxes, I am prepared to pay the capital gains on the year of the sale of the rental property. I am not going to try to defer the CA taxes because :

1) It is a clean cut with CA and I don't have to continue to file the FTB 3840 every year.

2) I have some CG losses to offset against part of the rental capital gains this year. It is not clear in future when I sell the rental if I can apply this CG loss.

3) If I eventually sell the rental in GA in the future, it is not clear to me if the state of CA will also want to tax me on the price appreciation that occurred on the rental property in GA. This price appreciation on the rental property in GA will then be subject to double taxation -- by CA and GA.
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Old 03-25-2016, 12:00 PM   #35
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For federal taxes, I will go through a 1031 exchange to defer the capital gain taxes when I sell the rental in CA and move to GA. In addition to the regular CG tax rate, I will save on the 3.8% medicare surtax because of my income this year.

For CA state taxes, I am prepared to pay the capital gains on the year of the sale of the rental property. I am not going to try to defer the CA taxes because :
It's not clear to me what you are proposing is legit (ie. the split basis) . I suggest you speak with an accountant. This issue cannot be unique to you.
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Old 03-25-2016, 12:06 PM   #36
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It's not clear to me what you are proposing is legit (ie. the split basis) . I suggest you speak with an accountant. This issue cannot be unique to you.
Probably so.

However, this appears to be the same end result if the FTB 3840 is not filed yearly. CA FTB will send you an assessment to ask you to pay the tax due to CA. Well, maybe not quite the same because there will be penalties involved in this case.
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Old 03-25-2016, 12:11 PM   #37
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CatotX:

Will the new state recognize a stepped up basis when the federal basis is different ?
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Old 03-25-2016, 12:26 PM   #38
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CatotX:

Will the new state recognize a stepped up basis when the federal basis is different ?
Good question for me to check.

However, I think I am OK to keep the same basis for federal and GA, though theoretically it is more advantageous to me if the basis under the GA tax rules can be stepped up.

Actually on second thought, I don't think a step up basis is likely. I think CA is one of the few states that do not fully comply with the federal 1031 rules. I believe if I had been exchanging a property OUT of GA into CA, the entire CG will be deferred. GA is not going to come after me like CA does.
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Old 03-25-2016, 03:25 PM   #39
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Absent the $150k real estate gain would you be in the 15% tax bracket once you ER? If so, you may want to consider an installment sale instead of a 1031 exchange.

No matter how you do it you will owe ordinary tax on depreciation recapture, but if you sell after you quit working then at least you may be in a lower tax bracket and that will help. If you structure the transaction so the gain is recognized over a number of years in a way that keeps you in the 15% bracket then you may avoid federal CG tax entirely.

It sounds like Ca will get their piece no matter what you do so a clean break would be better IMO.
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Old 03-25-2016, 04:15 PM   #40
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Absent the $150k real estate gain would you be in the 15% tax bracket once you ER? If so, you may want to consider an installment sale instead of a 1031 exchange.

No matter how you do it you will owe ordinary tax on depreciation recapture, but if you sell after you quit working then at least you may be in a lower tax bracket and that will help. If you structure the transaction so the gain is recognized over a number of years in a way that keeps you in the 15% bracket then you may avoid federal CG tax entirely.

It sounds like Ca will get their piece no matter what you do so a clean break would be better IMO.
Once I ER, I plan to be in the 15% bracket.

I have depreciated the property over the years but I wasn't able to use it because of my income level. I believe the terminology is that I have "passive loss carryforward" and this will be entered on the Sch E in the year of sale as an expense and will offset against ordinary income.
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