Wow, my last post was February? That’s a bit embarrassing as there has been a lot going on in the tax world. Our tax season last year was challenging to say the least, with twice as many tax clients being put on extension than normal. What with delays by Congress in modifying 2012 tax law until January 2013, and the resulting confusion at IRS about how to create forms, we were pushed back quite a bit.

Fortunately most of our clients understand it wasn’t our fault, and we are working through the backlog still.

Having said that, I saw a news flash come across my desk that I thought I should share, and its prompting me to get technical in this posting. Most people are aware of the ability to do a tax free exchange of business or investment property and delay paying tax on any gains. One of the strategies related to that has been to exchange a California property with a gain for an out of state property, and avoid ever paying tax to California on the deferred gain, even if the out of state property was subsequently sold. This worked particularly well when exchanging into a low (or no) tax state. California has always groused that such deferred gain should be taxable by California, but has lacked the authority and reporting resources to find and tax these transactions.

Not so anymore. Starting January 2014 anyone exchanging a California asset for an out of state asset in a tax deferred like kind exchange will be required to file annual reports with the Franchise Tax Board disclosing the whereabouts and ownership of the acquired asset. If you should ultimately sell the acquired asset California will demand the tax on the portion of gain that was deferred while you owned the in-state property.
Even if you have moved out of California.

Its nice to know that Sacramento finally has come up with a plan to keep businesses from fleeing to low tax states: Instead of lowering regulations and taxes to be competitive, they are simply going to chase you down wherever you relocate and tax you like you were still here anyway, so you might as well stay put..