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California and 1031 exchanges

Taxpayer owns commercial real estate in California. Does California follow federal with regard to 1031 exchanges in the following circumstances:

  1. Taxpayer is a California resident before and after the 1031 exchange involving Calif. replacement property.
  2. Taxpayer is a California resident before and after the 1031 exchange involving non-Calif. replacement property.
  3. Taxpayer is a California resident, and then becomes a Calif. nonresident before the 1031 exchange involving Calif. replacement property.
  4. Taxpayer is a California resident, and then becomes a Calif. nonresident before the 1031 exchange involving non-Calif. replacement property.
  5. Taxpayer is a California resident, and then becomes a Calif. nonresident after the 1031 exchange involving Calif. replacement property.
  6. Taxpayer is a California resident, and then becomes a Calif. nonresident after the 1031 exchange involving non-Calif. replacement property.

Basically, the taxpayer is getting fed up with California taxes, and is considering various options regarding his becoming a nonresident, and his options and strategies regarding his income property in California.

If he is able to avoid California taxes by doing a 1031 exchange for non-California property, will California have any tax claim when the non-California property is ultimately sold (when the taxpayer is a California nonresident)?

Thanks.

Reply to
Wallace
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Yes. You are not avoiding taxes when doing a like-kind exchange, simply deferring them (even at the federal level).

See FTB Pub 1100, Section F, specifically about deferred gains and losses.

"When you exchange one kind of property for the same kind of property under the requirements of Internal Revenue Code (IRC) Section 1031, you realize a gain or loss on the transaction and defer paying tax on the gain or claiming the loss until the property is sold or otherwise disposed of. A gain or loss from the sale or exchange of real or tangible personal property located in California is sourced to California at the time the gain or loss is realized. [...] "If you are a nonresident and exchange real or tangible property located within California for real or tangible property located outside California, the realized gain or loss will be sourced to California. Taxation will not occur until the gain or loss is recognized. This requires you to keep track of your deferred California sourced gains and losses to report them to California in the year you sell or otherwise dispose of the property received in the exchange. "

-Mark Bole

Reply to
Mark Bole

Thanks, Mark. Now let's talk about death. Assume the taxpayer holds on to replacement property until he dies. Assume, also, that the federal estate tax is reinstated to something like what existed before 2010, i.e. a taxable event, but with an adjusted basis to FMV at time of death. What is the impact on California taxes on the "gain". Do they vanish?

Reply to
Wallace

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