1031 exchanges can be used by any United States taxpayer on property within the United States. However, certain states handle the taxation of 1031 exchanges differently than others. In this article, we are going to talk about the different 1031 exchange treatments that exist in some states.
Federal Tax Code
First of all, it is important to note that section 1031 is a part of the federal tax code. That being said, not all states in the union treat 1031 exchanges the same as the federal government.
California is one such state that treats 1031 exchange taxation a little bit differently than other states.
When you do a 1031 exchange, you defer your capital gains taxes on the transaction. You can do this as many times as you want, but if and when you decide to cash out and sell your final property you are subject to capital gains taxes on that sale. In most states, the taxpayer pays these taxes in the state where they sell their final property. In California, the taxpayer is subject to capital gains accrued on California property, even if that taxpayer has since sold their California property and exchanged into property in a different state. This is known as the California “Claw-Back Provision”
If you have any specific questions regarding your exchange and how various state laws may impact it, don’t hesitate to reach out to a qualified intermediary for answers!
Exchange Your Real Property
At Commercial Partners Exchange Company, it is our goal to help each and every client through the 1031 exchange process as seamlessly as possible. Our qualified intermediaries have over two decades of experience working with clients in Minnesota and across the United States on their exchanges of real estate. Contact us today to learn more about our like-kind exchange services and get started with one of our intermediaries now. Our main office is located in downtown Minneapolis, but we work with clients all over the country.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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