California State Building
The California legislator are attempting to eliminate the 1031 & 1033 Tax deferred exchanges in AB 2640. A bill currently working it’s way through the process in Sacramento could have a serious effect on the real estate market and investor profits if passed into law. To make matters worse the bill would be retroactively effective to 1/1/2010.
The IRC Sec. 1031 Tax Deferred Exchange has been around in the federal tax code since 1921 and there is no indication that there is going to be any change there. There has been several modification’s to the law over the years, usually for the best as far as the investor is concerned, but occasionally some State Government will get a dumb idea and try to generate revenue from this source. I believe the last to attempt this were Utah and Pennsylvania. Utah had the good sense to repeal the law and I don’t know about Pennsylvania.
The California attempt to impose this tax will also backfire and finish up hurting business’ for a number of reasons. First thing I should mention is that the Federal Tax Deferment will still be in place so the first inconvenience will be the different tax returns and how the different deferments will be treated from earlier exchanges. I’m sure there are several forms and an extra hour or two of CPA’s time can clear this up.
A major problem for the local tax authorities I believe will be the loss of transaction and transfer fees. Los Angeles is a decent sized city with a lot of investment property and the transfer taxes on transactions amounts to a neat some of money at $1.10 per $1,000 transferred to the County and a whopping $4.50 per $1,000 to the City of Los Angeles. One of the attractions of Investment Property Investing is the ability to transfer your equity from building to building within the 1031 tax deferred exchange and have the entire gain working for you. If this incentive is removed, not only will it effect property values, it will also reduce transfers and the tax revenue generated by them.
Not only is the regular investment real estate 1031 exchanges effected, they’re also going to include the 1033 tax deferred exchanges used for eminent domain transactions. So not only can your property be condemned and taken for the public good, they’re going to tax you for the privilege as well.
Frankly, I’m puzzled! You’d think that someone in Sacramento would recognize the fact that the last 3 years have been rather brutal on the real estate industry and be smart enough to leave it alone until we get back to 2007 prices again. Apparently not!
Here’s and idea that might work and save us all a bundle. Since we’re doing a census this year, we’ll have all the numbers we need to eliminate exactly half of the elected officials and commissioners from our State Government.Yea! Good Luck with that 0ne catching on.
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California State Capital
