Massachusetts Rental Property 1031 Exchanged to a California Rental Property for CA Resident

[tony77777]

Our client is a California resident. He has a Massachusetts  rental property and 1031 exchanged to a CA rental property with higher FMV. He shouldn't owe any capital gain tax regarding this transactions on Federal and MA state level based on my research. However, when I input this 1031 transaction in Lacerte, it ask my client to pay capital gain tax in MA. I also did a test that if I put the new property state as MA, the capital gain tax was remove on MA tax form. I am a little confused. Does MA has a different 1031 exchange rule that forbids the non resident to exchange a property out of state? MA tax expert. Please help me. Thank you!!!

[George4Tacks]

Is the old rental property coded as MA property?

Are all the assets in depreciation coded to MA? 

Is the client coded as a CA resident? 

All of these questions are related to the way it has been done in prior years. I don't know the answer, but I think MA conforms to 1031. I did find this referring to the Clawback MA has https://www.ipx1031.com/video/massachusetts-1031-exchange-what-are-the-requirements-for-a-1031-excha...  That should still mean there would be no tax on the gain this year. 

You may need to make the long call to Support to get it to work properly

[tony77777]

Thank your George. We did all the coding correctly. The only thing change the result is that if we change the new property state to MA, the capital gain will be removed from MA. But the new property is located in CA, so once we did it correctly and put the CA as the state, there are capital gain in MA. So we want to check a MA CPA to see if there are special rules in MA and forbit the 1031 exchange property to other states. 

[George4Tacks]

I hope you can get someone in MA to confirm.

My research seems to show MA should be okay, but it does have a clawback. If you ever sell at a gain, it will be taxable in MA even though the client moved to CA. CA has a similar law and it requires filing a form (3840) every year to show you are still carrying this exchange as a potential CA gain, even if you are not otherwise required to file a CA return. 

Please post when you are comfortable with the proper presentation. Have you gone up the chain with Lacerte to discuss this? Maybe @IntuitGabi could find a support person to look at this.

[tony77777]

We haven't found any MA accountant to resolve this yet. Based on our research, there shouldn't be any capital gain in MA as well since the new 1031 property has not been sold yet.  Guess we have to talk with Larcete support regarding this. Thanks again!

[BobKamman]

If you code it for replacement property being in MA, does that affect the CA return?  If not, then do it that way.  Technically, with the "clawback" provision, the property is still in MA for tax purposes until it is sold.

I'm not in MA, I'm just a believer that the ends justify the means.  

[IntuitGabi]

Thanks @George4Tacks. We'll get a file from you and look into this if you haven't already resolved. 
@tony77777 Let me know if you've completed this: Follow these steps to begin a calculation challenge.

[tony77777]

Thank you Bob. I agree with you. We will code it to MA instead of CA for the new exchanged property. 

[tony77777]

Thanks for your guidance!