States Follow Federal Laws on Section 1031 Tax Deferral
While Internal Revenue Code (IRC) Section 1031 pertains to the deferral of tax on the federal level, the various states in the country generally follow the Fed’s lead in this regard. So, if a transaction meets the requirements of IRC Section 1031, the state in which the relinquished property is located will similarly recognize the tax deferral. However, a few states take this matter of deferral a bit further and will only allow taxpayers who trade into replacement property in the state to avoid ongoing reporting. For those states, should a taxpayer acquire out-of-state replacement property, there is a requirement to pay to the state the original amount deferred when the out-of-state replacement property is sold. These state provisions allow the states to reach out into a future transaction and require the tax be paid upon the original transaction. Due to this ability to reach out and pull back the tax deferral, these state requirements are sometimes known as “clawback” provisions. States with clawback provisions include:
Oregon
Montana
Massachusetts
California
The State of California and the Proposed Form FTB 3840