1031 Exchange California
Before mentioning the specific 1031 exchange California, let’s first understand the basic concept of a 1031 exchange. In a traditional sale of the property, a seller needs to pay capital gains taxes on any gain realized in the sale. One way that can be used to avoid paying capital gains taxes is to defer them by investing in a Section 1031 Exchange. As the name suggests, a 1031 Exchange contemplates an “exchange” of like-kind Property instead of a conventional sale. If the process qualifies, any realized gain is deferred until the replacement property is sold at a later date. One common misinterpretation is that property sold in California must be replaced by property in California; this is not true. The “like-kind” prerequisite is general and allows for an Exchanger to acquire property outside of California should they wish to do so.
Prerequisites for 1031 Exchange California:
The IRC (Internal Revenue Service Code) tells the prerequisites that must be met in order for a transaction to benefit from 1031 Exchange treatment. In addition to the prerequisites found in the IRS Code, Qualified Intermediary must follow extra guidelines legislated by the State of California for 1031 exchanges where the relinquished property or the one parked with the Exchange Accommodator Titleholder is located in California.
How does a 1031 exchange in California works? The rules for 1031 exchange in California states that any individual who facilitates it for a fee, advertises services as a facilitator in the state, or maintains an office in the state for the purpose of facilitating 1031 exchanges, is required to follow the California specific rules.,
A Qualified Intermediary working in California must have a bond in the amount of $1 million, deposit an amount of securities or cash or irrevocable letters of credit of an amount not less than $1 million, or deposit all the exchange funds in a qualified escrow account or trust account. Any individual who has continued damages as a result of a facilitator’s infringement rules may claim against the account, bond, or trust.
The California Franchise Tax Board additionally requires a 1031 Qualified Intermediary; generally, to withhold an amount equal to three or one-third percent of the sales price of any property as a contingency should the 1031 exchange not be completed.