California’s Automatic Extensions and Like-Kind Exchange
If certain conditions are met, taxpayers may defer gain from the sale of property, either in part or full under Internal Revenue Code (IRC) Section 1031 and conforming California laws. These transactions are commonly referred to as like-kind or 1031 exchanges.
In our January issue of Tax News, we shared some of the Common Audit Issues and Recent Developments in the Like Kind Exchange Arena, including when taxpayers do not meet identification or other technical requirements of IRC Section 1031. This article offers clarification of the impact of California’s automatic extension and the technical requirements of like-kind exchanges.
IRC Section 1031(a)(3)(B) requires that property received by a taxpayer will be treated as property which is nonlike-kind property if the property is received after the earlier of 180 days from the transfer of the relinquished property or the due date (determined with regard to extensions) of the taxpayer's federal tax return. Therefore, the federal extended due date should be used in determining whether the property is disqualified under IRC Section 1031(a)(3)(B).
California incorporates the provisions of IRC Section 1031 by reference in Revenue and Taxation Code (R&TC) Section 18031 and R&TC Section 24941, including IRC Section 1031(a)(3)(B).
Consequently, California will follow the federal treatment, regardless of whether or not the California return was filed under extension. Specifically, the federal extended due date should be used in determining whether the property is disqualified under IRC Section 1031(a)(3)(B).