Am I overthinking?

[GingerM]

Client sold rental property that was purchased in an exchange. The original property was sold in NY in 2011 and all gain was deferred by replacing with property in AZ using a 1031 exchange. Do I allocate the gain on NY to the original gain? The gain will be about $1M - $740,000 from the NY sale and the rest on the AZ property.

[Abby Normal]

The replacement property's basis should have already been reduced by the deferred gain, if it was done correctly, so there should be nothing you have to do. The current gain will include the deferred gain by virtue of the deferred having already reduced the basis of the property being sold.

[GingerM]

You are correct Abby Normal however, my question is regarding the states. NY tax should only be paid on the original gain not the current gain, correct? That is how it would have worked if the gain had not been deferred in 2011.

[Lee B]

5 minutes ago, GingerM said:

You are correct Abby Normal however, my question is regarding the states. NY tax should only be paid on the original gain not the current gain, correct? That is how it would have worked if the gain had not been deferred in 2011.

Excellent question !

[BulldogTom]

If you were in CA, they would be tracking that exchange and be looking for the gain to be paid to CA from the original deferral.

Tom
Modesto, CA

[GingerM]

47 minutes ago, BulldogTom said:

If you were in CA, they would be tracking that exchange and be looking for the gain to be paid to CA from the original deferral.

Tom
Modesto, CA

Thank you. I will research to see if NY has clarification.

[BulldogTom]

About 3 or 4 years ago, CA realized that people were doing exchanges, deferring taxes, moving out of state, and then selling the asset they deferred gain on without telling them and paying their tax (imagine that - sounds like good financial planning!).   They now have a form 3840 that you must file every year to tell them about the asset, even if you do not have a filing requirement in CA.   Fail to file the form and you get hit with a tax bill for the amount of deferred income.

This is probably TMI.   

Tom
Modesto, CA