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10/31 Tax Deferred Exchange?

November 11th, 2011 at 05:02 pm

I need some help with a tax rule. I talked with a realtor in California today and set up a date to meet with her when I travel to CA this month to make a decision about the CA property (rent or sell).

I like her so far. She is very friendly, knowledgable. She told me about 2 tax items I need to keep in mind:

10/31 Tax Deferred Exchange
I can use the proceeds of selling the property to buy a property in my state and there is a tax break if I choose to do that. She told me to talk to a tax lawyer about it. Is anyone familiar with this? Can someone explain this to me better?

FITB (Foriegn Investment Tax Back)
Any out of state owner selling a CA property has to pay 3.33% tax on proceeds to the state of CA. It's a tax that is unique to the state of CA. Is there any way to get out of that one?

I was able to follow the rest of her conversation well. We talked about the property and renting vs selling. She said she has property managers on her team if I decide to go that route. She is gointg to email me a few listings soon so I can starrt becoming familiar with the market.

9 Responses to “10/31 Tax Deferred Exchange?”

  1. MonkeyMama Says:

    Be careful of tax advice from a realtor. Ugh! (& this doesn't speak to competency of realtor - most non-tax-professionals don't understand the ins and outs of taxes. It's just people put trust in realtors, financial advisors, etc., who often have no idea what they are talking about).

    1031 exchange - this is basically an elaborate/expensive tax shelter. If this was not inherited property, it may be worthwhile. You would generally pay a third party to work out all the details - to sell your property and buy a new one with no tax owed. Well, you defer the taxes until you later sell that property.

    That said, you don't have any tax to shelter here. It is inherited property sold at a loss. Um, skip the tax shelter. IT just costs you more money.

    Though you were speaking to her in context of switching states, 1031 exchanges have nothing to do with whether the property is in the same state or another state. 1031 is federal tax law.

    Secondly - there is a law to withhold 3.33% on sales of ALL property in California. Again, this has nothing to do with your out-of-state status. That said, there are exceptions if you don't owe tax. You just complete a tax form when you close the sale, that states that the sales is non-taxable. I've had a lot of clients hassled about this by TITLE COMPANIES. All real estate transactions are done through title companies in California. I usually fill out the form and send it over. To be fair, I think title companies are just scared to not withhold the tax. So if a CPA tells them it is okay, they usually seem to go with it. I will be your CPA when you get to that point - if you need the help.

    This is the form - it is simple: http://www.ftb.ca.gov/forms/2011/11_593c.pdf
    You check the box that says there is no tax for sale. There is another form you fill out to show the calculation for your "loss."

    California initially enacted this law with no exceptions, for budget reasons. It is totally stupid and ridiculous, by the way. So they withhold tax that they have no real claim to and that they have to refund later. Our tax dollars at work!

  2. MonkeyMama Says:

    P.S. It is slightly possible California makes withholding mandatory for out-of-state-owners, no exceptions. & there could be a separate out-of-state issue with that. I will try to look into it.

  3. MonkeyMama Says:

    Okay - I don't see any difference for out-of-state sellers. No gain, no tax.

    This all reminds me that starting in 2012 if you hire a property manager, they will also have to withhold state taxes from rental income received. This is a law that has been heavily fought and pushed off and so I am not 100% sure what the status is right now. But looks like it may go into effect 1/1/12. So just FYI on hiring a property manager. (If *you* collect the rent, there is no tax withholding requirement. But property managers will be required to withhold taxes. Something like 7% - I am not sure).

    All the more reason to get the hell out of California. Big Grin

  4. gamecock43 Says:

    ok- the 10/31 exchange is not applicable because there are no gains. good- thats easy to understand.

    The 3.33% tax charge might not be applicable to me because I am selling at a loss? Thats good news, and filling out a form requesting them not to hold the money seems easy enough!

  5. MonkeyMama Says:

    Yes - you got it. The 3.33% is definitely not applicable to you - but good luck convincing the powers that be, is all. Wink
    It looks like that rent withholding went into effect last year (2010). I just haven't dealt with it at all. I add this statement to correct my prior statement.

  6. gamecock43 Says:

    ok, then I need to be collecting the rent! Good little info tidbit there.

    Well, in a matter of minutes I cleared up 2 tax questions, thanks so much!

  7. Jerry Says:

    MonkeyMama is awesome. Wink OK, so how exactly does California get off calling people from another part of the US "foreign?" That is ridiculous and it is wrong. That's a poorly-thought-out marketing job, if you ask me, to lead people to think that the law sounds patriotic or something. I agree with MonkeyMama, time to consider other places to live (I know you don't live there, I'm just saying...). Unless CA is somehow ready to secede from the Union, Americans from other states do not deserve to get crushed by their taxes. I hope that you are able to make this work for you and that you have some insurance of not getting taxed to the hilt!
    Jerry

  8. andgus Says:

    I suggested you speak with a Qualified Intermediary (QI) of 1031 exchanges. You may be subject to a 25% recaptured depreciation tax. Check out the Federation of Exchange Accommodators website to locate a QI. It is well worth the time to have a Certified Exchange Specialist listen to your transaction.

  9. MonkeyMama Says:

    @Gamecock - andgus brings up a good point that there may be some tax in regards to recaptured depreciation. Whether this applies to you or not is rather complicated.

    That said, I would still expect that tax hit to be on the small side, and not worth such a grand tax avoidance scheme. But, it may be worth talking to an accountant to be sure. (Be careful of free advice on the internet! Wink )

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