1031 exchange:
Dual Use

My brother and I inherited (via Living Trust) property in CA. Since the estate tax return was filed the property has appreciated $1.2M. We are considering a sale within the next year or so and seek information about 1031 exchanges. Specifically,

1. If one TIC currently lives in the inherited property (principle residence of my deceased parents) but the other does not, does it qualify for 1031? If not, how long does the property have to be unoccupied or leased to qualify?
2. Does a 1031 exchange defer both federal and state (CA) capital gains taxes? If state taxes are also deferred, does one have to exchange within the same state?
3. If one TIC lives in VA and the other in CA, upon sale which state is due the capital gains tax?

Thank you in advance for the initial consultation.

Dear Tom: Thank you for contacting. Your relinquished property can qualify for both tax exemption under IRC section 121 as to the owner using it a principal residence and for tax deferral as to the owner who is holding it for investment. It would be nice if the owner occupant paid the own not occupying some rent just to cement the investment intent of that owner. Yes 1031x defers both state and federal income in most instances (including CA). If you sell in CA it does not matter where you buy as long as it is in the US. As for as which state tax will apply is you do not do an exchange, generally you pay tax where you live. The state where the property is located CA has very high income tax (about 9%). If you live in VA, you will pay VA about 5% and then pay CA about 4%. What I am saying is that CA wants to get paid to but they will give you credit for the taxes you first pay in VA. I hope this is clear. If you need more let me know.

Sincerely,
Steve Hickox
Attorney / President

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