Possible restrictions on 1031s for real estate?
As a means of saving huge amounts on taxes, 1031 exchanges of real estate have always been in the cross-hairs of our rulers looking to generate more tax revenue. Rather than completely repeal Section 1031, the more likely approach is to whittle away at its usage. I recently came across two such attempts that are in the works.
Federal regarding farm land: 1031 Proposal In The Farm Bill Update
In California, a frequently proposed idea has resurfaced, to disallow referral of gain on the disposal of Calif. property when the replacement property is not also in Calif. Some other states have already implemented this kind of restriction, and if Calif does this, we can only expect many more states to follow.
We recently received the following news item in an email from Wachovia Exchange Services:
I recently received some information about California that might interest some of you. Hopefully, we will never see this proposal get
enacted. And I would hate to think that it might give any other states the same idea.
California, like a number of states, is faced with a severe budget shortfall. The legislature is therefore looking at a number of proposals
to raise revenues and reduce expenditures. As part of this effort, the California Legislative Administrative Office has proposed a revenue
raiser wherein an exchange of California property for out-of-state commercial property would not be eligible for deferral as a like-kind
California currently has a claw-back regime where California property is exchanged for non-California property. In such case, while the gain is deferred, if the replacement property is subsequently sold, the deferred gain is subject to California tax. The reason for the proposal is the administrative difficulty in taxing the gains once the property has left the state.
This is just a proposal at this time; however, it should be noted that California has a history of non-conformity with the federal tax rules,
so it would not be out of character for it to have different rules for like-kind exchanges.