James T. Walther, Esq., LL.M.
General Counsel
Legal 1031 Exchange Services, LLC
September 10, 2019
With the recent enactment of AB-91 “Loophole Closure and Small Business and Working Families Tax Relief Act of 2019” California has finally conformed its state tax code, selectively, to several of the changes to the federal tax code made by the Tax Cuts and Jobs Act of 2017 (“TCJA”), including its revisions to IRC Section 1031 which limited exchanges to real property only.[1] Prior to the passage of the TCJA, taxpayers were able to exchange personal property held for business or investment to defer federal capital gains taxes and potentially defer state taxes, depending on state conformity to the federal tax code. However, the new CA law only applies this limitation to individuals who have a gross income over $250,000 and joint filers or heads of household making over $500,000 in the year in which the exchange is started. Therefore, the law makes CA taxpayers with incomes below these thresholds exempt from the limitation on exchanges to real property. The law applies to 1031 exchanges started after January 10, 2019.[2]
Prior to AB-91’s enactment, all CA taxpayers were able to conduct tax deferred exchanges of personal property used in a trade or business, because CA still conformed to IRC Section 1031 as it was on January 1, 2015.[3]
Also, of note is that the California Legislature intentionally left a provision regarding Opportunity Zones (“OZs”) out of AB-91. The Legislature is still debating how to proceed on OZs. It may eventually proceed with limited conformity to the OZ program, for example, OZ projects may be limited to certain uses/purposes, such as: workforce housing, low-income housing, renewable energy, etc.[4] In addition, CA may be leaning towards limiting the statewide aggregate amount of capital gains that can be deferred into OZs, with an individual fund limit.
When evaluating any real estate investment and real estate tax strategies, taxpayers and their advisors should be certain to review state and local law conformity to the TCJA and analyze its effect on their transaction.
#commercialrealestate #opportunityzones #statetax #1031exchange
[1] Several states do not automatically conform to changes in federal tax law. CA is one of these non-conforming states. “California law does not automatically conform to changes to federal tax law, except for specific retirement provisions. Instead, the Legislature must affirmatively conform to federal changes.” See CA Senate Committee on Budget and Fiscal Review Report, available at: https://leginfo.legislature.ca.gov/faces/billAnalysisClient.xhtml?bill_id=201920200AB91
[2] See links to the final version of the law and analysis here: https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB91
[3] “We conform to IRC section 1031 as it was on January 1, 2015. As of January 1, 2018, federal law changed to limit 1031 to real property. We do not conform to this change.” See https://www.ftb.ca.gov/file/personal/reporting-like-kind-exchanges.html (last visited September 9, 2019).
[4] See report and recommendations of California Legislature Analysts Office, available at: https://lao.ca.gov/Publications/Report/4038
Legal 1031 Exchange Services, LLC does not provide tax or legal advice, nor can we make any representations or warranties regarding the tax consequences of any transaction. Taxpayers must consult their tax and/or legal advisors for this information.
Disclosure: This to advise you that, unless otherwise expressly indicated, any perceived federal tax advice contained in this article/communication, including attachments and enclosures, is not intended or written to be used, and may not be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.