Personal Property 1031 Exchanges Still Allowed by California Franchise Tax Board

Update to Blog Post as of December 26, 2020 

The California Franchise Tax Board has now conformed in late 2019 to the changes affecting Section 1031 of the Internal Revenue Code that were contained in the Tax Cuts and Jobs Acts of 2017.  Personal Property 1031 Exchanges no longer qualify in California. 

The Like Kind Exchange (LKE) is a tax deferred transaction or strategy allowed under Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations ("1031 Exchange").  This means it is a Federal tax code.  However, most state governments conform to (or follow) the Federal tax code, with certain limited exceptions or adjustments made at the state level.  

Pennsylvania Does Not Recognize 1031 Exchanges

Perhaps the most notable exception is the State of Pennsylvania, which does not recognize the 1031 Exchange for state tax purposes. Investors can still sell property and defer the payment of Federal capital gain and depreciation recapture taxes, but would recognize and pay Pennsylvania taxes.  

California Franchise Tax Board 

California is no exception.  The California Franchise Tax Board (FTB) has generally conformed to Section 1031 of the Internal Revenue Code, although they take a much more aggressive position on certain issues during audits than does the Internal Revenue Service. 

Personal Property 1031 Exchanges Still Allowed in California 

However, California did not conform to (or follow) the changes affecting Section 1031 of the Internal Revenue Code that were contained in the Tax Cuts and Jobs Act of 2017.  The Tax Cuts and Jobs Act of 2017 eliminated the ability to structure a 1031 Exchange on the sale of personal property (non-real-estate) at the Federal level.  

Investors can still use the 1031 Exchange to defer the payment of their California taxes on the sale of personal property that is held and used as rental, investment or business use property.  They would, of course, have to pay the Federal capital gain and depreciation recapture taxes, but would at least be able to defer the payment of the California taxes.