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Old 03-25-2016, 04:20 PM   #41
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I guess my point is that if you structure the transaction right that you may be able to avoid or minimize federal income tax on your embedded gain and it sounds like Ca will get a piece no matter what you do. Given the amount involved I think you may want to consult with a CPA tax practitioner.
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Old 03-25-2016, 08:40 PM   #42
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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.
Not lucky, I live in CA with the rental, but reviewing my options for leaving the state in 4 years or so..
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Old 03-25-2016, 09:26 PM   #43
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Not lucky, I live in CA with the rental, but reviewing my options for leaving the state in 4 years or so..
Well. we are in the same boat then, except that I am planning to leave next year. Some options mentioned in this thread to reduce the CA tax due:

a) Harvest tax losses (stock market)
b) Explore installment sale of the house
c) Move into the rental yourself. I think the rule now is that you need to live there for at least two years to get some benefit.
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Old 03-25-2016, 11:38 PM   #44
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I think many of the points have been covered, but I will add my experience. I moved out of CA (no regrets at all, BTW) and kept my CA house as rental for 3 years. At that time I sold so I met the 2 of last 5 years primary residence rule and avoided any capital gains. I did make money on the sale vs purchase price. While out of state, I did lose money each year, so did not have the income tax problem. In fact it pissed me off when I was not able to claim the deduction on taxes and had to carry it over since total income was over the fed limit. Once sold I was able to recapture that, but it sucks not being able to take it when in the year it should apply.


I tend to agree, just get completely out of CA and make the break. If you do keep the house as rental, make sure you take a big enough equity loan out so it is cash negative for tax purposes unless you just want to keep giving income taxes to CA. You will be giving prop taxes, so it is not like CA is getting nothing. I am more than happy to have no further dealing with CA FTB.
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Old 03-26-2016, 12:37 AM   #45
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a) Harvest tax losses (stock market)
b) Explore installment sale of the house
c) Move into the rental yourself. I think the rule now is that you need to live there for at least two years to get some benefit.
also considered exchanging it into an upgraded CA home. Rent it for a year, convert it to my residence, then sell after two years to move out of state. I'm not a fan of holding real estate short term in conjunction with high transaction costs though, so not likely a plan.

I'm still trying to figure how CA can go after me if I move out of state. If I exchange a rental to an out of state property, but I still reside in CA, I understand. If I move out of CA's jurisdiction, with no property or income, I should have no responsibility to file anything in the state.
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Old 03-26-2016, 01:00 AM   #46
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also considered exchanging it into an upgraded CA home. Rent it for a year, convert it to my residence, then sell after two years to move out of state. I'm not a fan of holding real estate short term in conjunction with high transaction costs though, so not likely a plan.

I'm still trying to figure how CA can go after me if I move out of state. If I exchange a rental to an out of state property, but I still reside in CA, I understand. If I move out of CA's jurisdiction, with no property or income, I should have no responsibility to file anything in the state.
I think the article below explains it well

California Claw-Back Provision: Putting the Claw in Claw-Back | California Like Kind Exchange Reporting Requirements | Exeter 1031 Exchange Services, LLC

If you exchange out from CA to another state, and you eventually sell the property, you will be double-taxed on the portion of the capital gains that was realized when the property was sold in CA. This portion is taxable by both CA and your new state (unless your new home state is one without income taxes).

I am leaning towards making a clean cut and be rid of CA's tax claws.
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Old 03-26-2016, 01:05 AM   #47
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I think many of the points have been covered, but I will add my experience. I moved out of CA (no regrets at all, BTW) and kept my CA house as rental for 3 years. At that time I sold so I met the 2 of last 5 years primary residence rule and avoided any capital gains. I did make money on the sale vs purchase price. While out of state, I did lose money each year, so did not have the income tax problem. In fact it pissed me off when I was not able to claim the deduction on taxes and had to carry it over since total income was over the fed limit. Once sold I was able to recapture that, but it sucks not being able to take it when in the year it should apply.
Good move for you. It seems like it all worked out, even though it took a while.
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Old 03-26-2016, 08:15 AM   #48
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If you move and then sell the following tax year, isn't your Ca tax about $11k assuming a $150k gain is your only Ca income that year? My point is that you seem to be willing to go through a lot of contortions to avoid paying $11k that they are going to get one way or another.
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Old 03-26-2016, 10:46 AM   #49
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I think the article below explains it well

California Claw-Back Provision: Putting the Claw in Claw-Back | California Like Kind Exchange Reporting Requirements | Exeter 1031 Exchange Services, LLC

If you exchange out from CA to another state, and you eventually sell the property, you will be double-taxed on the portion of the capital gains that was realized when the property was sold in CA. This portion is taxable by both CA and your new state (unless your new home state is one without income taxes).

I am leaning towards making a clean cut and be rid of CA's tax claws.
Oh yes, I read that three times over. But it doesn't differentiate residence in CA. What's next, I move out of CA and I still need to file when I sell my stocks & funds so I can pay cap gains tax to CA? I'd like to see a challenge to the 3840 by a non-CA resident. If I'm out of CA jurisdiction in all ways, the state should have no right to know what I do and I should have no responsibility to file anything.
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Old 03-26-2016, 11:10 AM   #50
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If you move and then sell the following tax year, isn't your Ca tax about $11k assuming a $150k gain is your only Ca income that year? My point is that you seem to be willing to go through a lot of contortions to avoid paying $11k that they are going to get one way or another.
Yes, if I sell the rental a year after I move out, the CA tax rate is probably a little lower. I have considered this option but decided not to pursue this because of

1) the uncertainly of housing prices (prices now at all time high, not sure what will happen in 2018).
2) I don't want to deal with the rental from 2000 miles away.

My portfolio return has been averaging 8% annualized return over the past 10 years. Rental return (if I don't consider taxes) is somewhat similar but generally with more hassles.

A part of me simply just want to be rid of rentals and put the money into the portfolio. With my portfolio, at least the end game is clear -- I will hold it forever without the need to realize capital gains, but with a rental, do I sell it sometime in the future, realize capital gains and pay taxes?

Of course the other part of me wants to investigate 1031 exchanges to defer taxes for as long as possible. :-)
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Old 03-26-2016, 11:14 AM   #51
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Here's another article that lightly addresses the "non-resident" aspect:

https://www.accruit.com/1031-news/ca...hange-ftb-3840
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Old 03-26-2016, 11:15 AM   #52
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While a total excess use of state power, as long as you hold physical assets in CA, CA can claim nexus--the right to tax those assets. A pretty well acceptable principle in taxation.
Your intangible assets--stocks and bonds--are just that intangible and have no "physical" presence so no nexus.
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Old 03-26-2016, 11:29 AM   #53
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Oh yes, I read that three times over. But it doesn't differentiate residence in CA. What's next, I move out of CA and I still need to file when I sell my stocks & funds so I can pay cap gains tax to CA? I'd like to see a challenge to the 3840 by a non-CA resident. If I'm out of CA jurisdiction in all ways, the state should have no right to know what I do and I should have no responsibility to file anything.
I think you're being unreasonable. From what I read it seems that the 3840 was put in place to prevent people with Ca property from avoiding Ca tax on the appreciation simply by doing a 1035 exchange to another state and then selling.

They just want the tax on the appreciation during the period that you owned the property as if you sold it rather than did a 1035. I suspect that if you went to them and said I'm doing a 1035 exchange to another state but will pay the tax as if I sold at fair market value as of the date of the 1031 exchange so I don't have to file these pesky 3840 then they would be fine with taking your money and relieving you of the filing obligation.

Also, there would never be double taxation because any tax paid to Ca could be claimed as a credit by your new resident state if that state has a state income tax.

It seems to be greedy to indignantly think you should never have to pay tax on the gain.

I guess that this does however, point out an advantage of being a bond/stock investor over a real estate investor in that if you were a bond/stock investor and had an investment with a significant appreciation and moved from Ca then if would never be subject to tax.
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Old 03-26-2016, 03:16 PM   #54
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Here's another article that lightly addresses the "non-resident" aspect:

https://www.accruit.com/1031-news/ca...hange-ftb-3840
Given this thread has been focused on the former CA taxpayer, the above referenced article makes the point that former residences of Oregon Montana Massachusetts are also exposed to claw-back provisions on 1031 exchanges.
So apparently a bunch of other folks "share the pain" of trying to escape the tax demands of their former home state.
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