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Posted by finniganps on June 3, 2006, 9:44 am
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Facts are: Taxpayer and wife had two homes (house 1, house
2) which they lived in many years ago and later rented to
third parties continuously. Both homes are located in CA.
The last one they lived in (home 2) as their principal
residence was in 1995 (they had lived there for 10 years).
Then they sold both properties with a low basis in 2001 as
part of a 1031 exchange for House 3 that cost more than the
two combined and was located in FL.
2001 was the last year taxpayer filed in CA because they
moved out of state. No CA tax was paid on the 1031 exchange
in 2001. House 3 was rented for at least 12 months and then
taxpayer moved into it as the principal residence in 2003.
They put in extra cash/took on debt to purchase house 3.
They sold house 3 in 2006 for a gain. It appears to me that
the entire gain deferred under 1031 is taxable under
=A7121(d)(10). Do you agree, or am I missing something? I
believe it is all taxable because,
a) There was no 121 exclusion in 2001 on home 2 because they
didn't meet the 2 of 5 rule (so carryover basis applies).
b) Home 3 does not meet the standard under =A7121(d)(10)
which says they must live there 5 years if the property was
part of a 1031 exchange. They lived there more than 2 years,
but not 5.
c) Some of the transaction will be taxes at 25% for any 1245
property.
d) There's also a question of whether CA is entitiled to
some of this gain even though they no longer have a tax
presence in CA, but arguably some of the gain is CA sourced.
Any thoughts on this computation - I assume it would be
based on CA tax deferred from 2001 values sold as opposed to
2006?
Am I missing anything? Any additional thoughts on this?
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