California Puts Claw in Claw Back Law

Sale of Real Estate Triggers Tax

When a taxpayer and/or investor sells real property the sale generally triggers a capital gain tax (or loss), and if it is rental, investment or business use real estate, it may also trigger depreciation recapture tax.  These taxes are due in the year in which you sell or dispose of the real estate.  However, there are methods for deferring the payment of these taxes, including a tax-deferred exchange transaction for investment real estate pursuant to Section 1031 of the Internal Revenue Code ("1031 Exchange"). 

Defer Tax With A 1031 Exchange

Real estate investors normally do not realize and pay these capital gain and depreciation recapture taxes because they structure their sale of the real estate through a 1031 Exchange.  In fact, most investors rarely pay these taxes because they will continue to 1031 Exchange throughout their lifetime and their heirs will receive a step-up in cost basis (i.e. the capital gain and depreciation recapture taxes completely go away) at the investor's death.   

Selling Property In One State; Buying In Another

However, what happens when the investor sells their relinquished property in one state - say the State of California - and then reinvests through a 1031 Exchange in replacement property located in a different state?  The majority of states just look the other way, and those that have tried to address it via legislative action do not really enforce it.  The State of California is a different matter and investors need to be aware of recent changes to California tax law. 

California Claw Back Requirement

California has always taken the position if you sell rental, investment or business use real estate in California and defer the payment of your capital gain tax and depreciation recapture tax through a 1031 Exchange by acquiring replacement property in another state other than California that they want their fair share of the capital gain and depreciation recapture taxes if and when the investor ultimately sells the real estate, "cashes out" and pays their tax in the future.  This tax policy is often referred to as the California Claw Back because the State of California insists on "clawing the tax revenue back" from the other state when the investor ultimately sells and incurs the tax liability.  However, the State of California had no effective way to track, monitor or police taxpayers when they 1031 Exchange out of California investment property and into real estate located in another state, until now. 

California Puts The Claw In The Claw Back Law

The State of California passed new legislation in 2013 that effectively puts the "claw" into the California Claw Back.  The new law is effective for any sale of rental, investment or business use property that closes on or after January 1, 2014.  It requires that the investor file an information return with the State of California.  The information return must also be filed each year thereafter keeping California in the loop so that they know if and when the investor ultimately sells and cashes out and therefore owes California their share of the taxes. 

Gift Limit Increased by IRS for 2013

Taxpayers are allowed to "gift" real estate, personal property and/or money to other individuals without having to pay any kind of corresponding taxes because of the gift provided the taxpayer follows certain gift limitations set forth by the Internal Revenue Service. 

Annual and Lifetime Gift Limits

The are two (2) different types of gift limitations.  There is the annual gift limitation and there is the lifetime gift limitation.  These limits are established by Congress and administered by the Internal Revenue Service. 

Annual Gift Limit Increased for 2013

The annual gift limit is set annually by the Internal Revenue Service pursuant to a formula pre-established by Congress.  The Internal Revenue Service just announced that the Annual Gift Limit for 2013 has been increased to $14,000.00 (it was $13,000.00 for 2012).

Tax Benefits of a 1031 Exchange Should Not Overshadow Financial Benefits

Real estate investors frequently jump into acquisitions of replacement real property as part of their 1031 Exchange transaction, and that may not be well suited for their investment goals and objectives.  The rush into these investments is certainly understandable due to the stress placed on the investor due to the 1031 Exchange deadlines involved.

Tax Benefits Should Not Guide Investment Decision

However, while the tax benefits related to structuring the 1031 Exchange are certainly important, the financial and economic elements of a replacement real property should not be ignored simply because of the 1031 Exchange identification and completion deadlines. 

Real estate investors should let the economics of the replacement real property guide their final investment decision instead of making their decision based solely on the income tax benefits involved by 1031 Exchanging into another replacement property.

Delaware Statutory Trusts

Delaware Statutory Trusts, also referred to as DSTs, can also provide another investment vehicle for real estate investors to consider.  The more options the real estate investor has at their disposal the more likely he or she will find the most suitable investment for their 1031 Exchange and not be forced into "jumping" into the wrong investment. 

Real Estate Economic & Demographic Trends, Analysis and Forecasts

The World and the West

The "Great Recession" has left many of us scratching our heads and wondering what's next?  Where do we go from here?  How should we re-position our real estate portfolio going forward now that we are emerging from the recession?  Should I hang tight, or make an investment move now?

Make Better Informed Investment Decisions

We realize these are confusing times, which is why Exeter 1031 Exchange Services, LLC is hosting this webinar for you.  Our goal is to provide you with up-to-date real estate market data and information so that you can make better informed investment decisions.

This exciting webinar will provide an update on the real estate market on a local, state, national and global point of view as well as an overview of certain demographic trends that will affect investment real estate.  It will help you answer the above questions, and help you decide how to position your own investment portfolio as we move forward beyond the recession. 

Advanced Registration Is Required 

Click here to register for this webinar on economic and demographic trends.

Reverse 1031 Exchange Webinar

Save Your Deal With a Reverse Exchange 

Today's rapidly evolving real estate market has lots of investment opportunities available for the real estate investor, but you have to move very quickly to take advantage of the investment opportunities (or lose them).  

The Reverse Exchange can help. 

You don't have to wait until you have listed and sold your existing property. You can take advantage of investment opportunities as they come up by buying your replacement property first and then worrying about selling your existing relinquished property later. Eliminate the risk of paying taxes due to a failed 1031 Exchange Take advantage of unexpected investment opportunities by acquiring your replacement property first and then selling your relinquished property later.

Complex Reverse 1031s Briefly Addressed

Learn how to combine a Reverse 1031 Exchange with a Forward 1031 Exchange so that you have up to 360 days to complete your over all transaction.  This is not one 1031 Exchange, but two (2) 1031 Exchange strategies combined together.

This is a basic to intermediate level Reverse Exchange Webinar that discusses the benefits and advantages of deferring the payment of your capital gain and depreciation recapture taxes by structuring a Reverse 1031 Exchange where you acquire your replacement property before you sell your relinquished property. We'll address the requirements, structures, processes, strategies, and compliance issues necessary to successfully complete a Reverse 1031 Exchange. There will be plenty of time for questions and answers.

Registration Required 

Click here to register for this Reverse Exchange Webinar.