Discussion:1031 Exchange Audit by FTB (California)
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Discussion Forum Index --> Tax Questions --> 1031 Exchange Audit by FTB (California)
| September 18, 2008 | |
| One of my clients has been selected for an audit of a 2004 1031 exchange (statute of limitations is 4 years in CA). I have always taken the position that accrued interest and prepayment fees on loans on the relinquished property can be treated as non-recourse debt from which the Investor is relieved of and can be offset against debt assumed on the replacement property. In other words, I have never considered it taxable boot which the FTB auditor is doing.
I have also considered points and loan acquisition costs for the replacement property to be serviced from the proceeds of the loan. The FTB auditor is taking the position that they are serviced from the exchange funds and thus considering it taxable boot. Has anyone had any experience with either an IRS or FTB audit on 1031 exchanges with these issues. If so, what has been the final result? Are there any references you are aware of that support the position that these items are not taxable boot? I can only find a handful of court cases that begin to speak to taxable boot and none of them address these issues. | |
| 18 September 2008 | |
| Debt relief associated with a mutual assumption of debt between parties to the exchange can be offset against the debt assumed from the other party to the exchange. Debt assumptions are very rare in the present economy.
If this was a non-simultaneous exchange, the FTB auditor may be correct. Let me know if you need citations. | |
