When using a Section 1031 exchange under the Internal Revenue Code, property owners can defer recognition of gain for “like kind” property exchanges. Under the IRS rules, tax on this property may not be due until the time that investors actually sell the newly-acquired property.

Previously, nonresidents who sold California real estate and replaced it with out-of-state property were “on their honor” in paying the California tax when the property was liquidated. These circumstances will all change starting on January 1, 2014.

Taxpayers who use I.R.C. sec. 1031 to defer gain will, beginning next year, have to file a new California information return when selling California property and replacing it with out-of-state realty. This new requirement is due to Assembly Bill 92, which imposes annual filing requirements for these individuals. The required return will have to be continually filed until all of the deferred California-sourced gain is recognized.

It is always helpful to seek the advice and counsel of experienced tax attorneys that have practiced in the state of California and understand the tax compliance requirements for individuals or businesses from other states. Out-of-state tax compliance with California tax requirements can prove to be a challenging task. And as Assembly Bill 92 demonstrates, it is likely that the laws will continue to evolve.

Individuals or businesses from another state may not be familiar with the complex filing requirements that have been put in place by California laws. Also, it’s important to note that the laws affecting those from out-of-state are not confined only to real estate transactions. It can also involve goods purchased from an out-of-state seller that are consumed or stored in California.