Federation of Exchange Accommodators - Final FTB ......9/12/2019 5 9 •Certify to the extent you...

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BIG IDEAS IN THE BIG EASY

FEA 2019 Annual Conference

Patricia Carte, Blake Cunningham, Ciro Immordino, The California Franchise Tax Board’s

View of IRC Section 1031

September 11–13, 2019Roosevelt New Orleans

New Orleans, LA

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• Withholding

• Audit & Form 3840

• Common Structures Update

Topics

Collaborative Competent Committed

WithholdingPresenter:

Patricia Carte – Program Manager– Filing

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Withholding is a prepayment of tax.

Generally California requires withholding from the sale or exchange of California real property.

Withholding

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Persons having the control, receipt, custody, disposal, or payment of items of income made to nonresident individuals and non‐California business entities.

A Qualified Intermediary (QI) is identified as a withholding agent because you have control, receipt and custody of the funds.

Withholding Agent

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3 Automatic Exemptions:

• Sales Price is $100,000 or less OR

• Seller is a bank acting as a fiduciary for a trust OR

• Property is being foreclosed

Withholding Automatic Exemptions

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Form 593 Exemption Verification

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• Certify to the extent you have actual knowledge of the facts that the form is accurate and complete.

• Form must be received prior to close of the deferred exchange and any cash is distributed to the transferor.

Responsibilities Form 593 Exemption Verification

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In a deferred exchange the Qualified Intermediary is required to withhold in 2 situations:

1. Boot

2. Failed Exchange

QI Withholding Requirements

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Boot:

When the transaction has money or other property exceeding $1,500 withholding should be completed.

QI Withholding Requirements ‐ Boot

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Failed Exchange:

If the exchange does not materialize or does not qualify for non‐recognition treatment within Internal Revenue Code Section 1031 then withholding is due.

In a failed exchange, you may have no withholding if you meet an exemption.

QI Withholding Requirements ‐ Failed Exchange

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Responsibilities ‐ Withhold and Remit

For Boot

You withhold 3 1/3 percent of the total boot.

For the Failed Exchange

You can use either method below.

• Total sales price method – 3 1/3 percent of total sales price

• Alternative method – Reportable gain X Sellers maximum tax rate

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If there is boot or a failed exchange withholding needs to be completed prior to close of the transaction.

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Upon completion of the transaction the withholding is due by Jan 31 of the following year. Beginning 1/1/2020 the withholding is due the 20th day of the following month.

• Submit the Form 593

• Submit the Form 593‐V

• Submit the withholding amount due

Responsibilities ‐ Withhold and Remit

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• Retain a copy of the withholding form for 5 years following the closing date of the transaction

• Forms must be made available to FTB upon request

Responsibilities – Retain Copies

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We will review your records to:

• Validate any withholding exemptions

• Validate you accurately withheld when necessary

• Verify you retained the required forms

Withholding Audits

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Withholding Audits ‐ Audit Findings

Failure to Withhold Liability

You will be held liable for

• the amount that was not withheld

• $500 or 10% of withholding whatever is greater

Information Return Penalty

Will be assessed for any Form 593 that was not completed accurately and submitted timely.

Can range from $50 to $250

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New Combined Form 593, Real Estate Withholding Statement

• Available Mid‐November

• Use for property sales closing Jan 1, 2020 forward

• New due date: 20th day of the following month after close

• Form sent to FTB for every real estate sale or exchange

Withholding Regulation Update

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Form FTB 3840Presenter:

Blake Cunningham – Program Specialist II – Audit

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It is used to report like‐kind exchanges of California business or investment property for out of state like‐kind property, and to allocate the California source deferred gain to the properties received in the exchange.

What is the Form FTB 3840?

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Under California Revenue & Taxation Code (R&TC) § 18032 and 24953,

California requires taxpayers who exchange real property located in California for

like‐kind property located outside of California to file an annual information return, FTB 3840, with the FTB regardless of Residency/Domicile.

For Taxable Years Beginning On or After January 1, 2014…

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FTB 3840 must be filed for the taxable year of the exchange and for each subsequent taxable year, generally until the California source deferred gain or loss is recognized on a California tax return. If the taxpayer:

• Has a California filing requirement, attach FTB 3840 to the California tax return.

• Does not otherwise have a California filing requirement, file separately as a California information return.

When is Form FTB 3840 Filed?

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The FTB may issue a Notice of Proposed Assessmentto adjust the income for the California source deferred gain and assess tax plus any applicable penalties and interest.

What if Taxpayers Fail to File FTB 3840 as Required?


Sourcing

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Gain Result Upon Sale

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Property Location (States)

CA Resident Is Taxable On:

CA Nonresident Is Taxable On:

CA Non‐CATotal Gain (CA OSTC)

Deferred CA Gain(Recognized gain if lower)

Non‐CA CATotal Gain (CA OSTC)

CA Appreciation

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• As a resident of Texas, you exchanged a condominium located in California for like‐kind property located in Texas.

• You realized a gain of $15,000 on the exchange that was properly deferred under IRC § 1031.

• You then sold the Texas property in a nondeferred transaction and recognized a gain of $20,000.

What is the amount of California Source gain?

Example 1: (Example 17 – FTB Publication 1100)

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Determination:

The $15,000 deferred gain (the lesser of the deferred gain or the gain recognized at the time you disposed of the Texas property) has a source in California and is taxable by California.


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• As a resident of Nevada, you exchanged Nevada business property for like‐kind California business property.

• You realized a $10,000 gain on the exchange that was properly deferred under IRC § 1031.

• You then sold the California business property in a nondeferredtransaction and recognized a gain of $50,000.

What is the amount of California source gain?


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Determination:

$40,000 of gain has a California source and is taxable by California. This is because there is inherent gain of $10,000 from the Nevada property that is sourced to Nevada. The remaining gain is California source.


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Gain Result Upon Sale

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Property Location (States)

CA Resident Is Taxable On:

CA Nonresident Is Taxable On:

CA Non‐CATotal Gain (CA OSTC)

Deferred CA Gain(Recognized gain if lower)

Non‐CA CATotal Gain (CA OSTC)

CA Appreciation

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• While a resident of Kansas, you exchanged real property located in Kansas for like‐kind real property located in California.


• You then became a California resident and, while a resident, you sold the California property in a nondeferred transaction and recognized a gain of $40,000.



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Determination:

California taxes the $40,000 gain because you were a California resident at the time of the sale. If you paid tax to Kansas on the $12,000 deferred gain, you are allowed a credit for taxes paid.


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• As a resident of New York, you exchanged California business property for like‐kind New York business property.


• You then sold the New York business property for $75,000.


Example 4: (New)

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Determination:

$50,000 of gain has a California source and is taxable by California.

There is inherent gain of $50,000 from the New York property that is sourced to California. The remaining gain is New York source.

If you paid New York on the $75,000 gain, you may be able to claim an Other State Tax Credit (OSTC) with New York for the taxes paid.

Example 4: (New)

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Note:

• California would require you to file form FTB 3840 from the date of the exchange of California property until the replacement property is sold or otherwise disposed of.

• You would file a final year FTB 3840 in the year of the sale.

• If you do another exchange, you would continue to file FTB 3840 regardless of the location of the replacement property.

Example 4: (New)

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In February 2019, we mailed approximately 3,200 FTB 3840 Education and Outreach Letters for the 2016 taxable year. Letters were sent to individual taxpayers and business entities with 1 of 2 situations:

1. They filed an incomplete FTB 3840 with their 2016 tax return, or

2. They did not file an FTB 3840 with their 2016 California income tax return and they filed an FTB 3840 with their 2014 or 2015 California income tax return, but did not check the Question B box labeled Final FTB 3840 to indicate that they will no longer have a filing requirement.

Errors – Education and Outreach Letters

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Errors ‐ Form 3840 is Blank

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Errors ‐ Lines A, B, and C

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Errors ‐ Part I: Information on Like‐Kind Exchange

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Errors ‐ Part II: Realized Gain or (Loss), Recognized Gain, and Basis of Like‐Kind Property Received

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Errors ‐ Part II: Realized Gain or (Loss), Recognized Gain, and Basis of Like‐Kind Property Received

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Errors ‐ Sch A: Properties Given Up & Received Part I: Properties Given Up

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Errors ‐ Sch A: Properties Given Up & ReceivedPart I: Properties Given Up

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Errors ‐ Sch A: Properties Given Up & ReceivedPart I: Properties Given Up

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Errors ‐ Sch A: Properties Given Up & ReceivedPart II: Properties Received

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Errors ‐ Sch A: Properties Given Up & Received Part III: Allocation of California Source Deferred Gain

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Common Structures UpdatePresenter:

Ciro Immordino – Tax Counsel – Legal

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Certain Structures Update

• Rescue Transactions

• Drop & Swap• Partnership Installment Note (PIN)

• Allocations• Bifurcation

• Swap & Drop

• Refinance

• Related Party ‐ 1031(f)

• Non‐safe Harbor Reverse (Bartell)

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Learn More at ftb.ca.gov

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