Current Events in the World of Industrial Property

CALIFORNIA ASSEMBLY BILL 2640: PROPOSED REPEAL OF
SECTION 1031 AND OF OTHER NONRECOGNITION PROVISIONS
OF THE INTERNAL REVENUE CODE EFFECTIVE JANUARY 1,
2010
California taxpayers who engage in tax-deferred
transactions under Section 1031 and other provisions
of the Internal Revenue Code should take note of
Assembly Bill 2640 (“AB 2640”), introduced last
Friday, February 19, 2010. If enacted, AB 2640 would
repeal many nonrecognition provisions of the Internal
Revenue Code, including Section 1031, for California
income tax purposes. The repeal would be effective
for taxable years beginning on or after January 1,
2010. Besides Section 1031, AB 2640 would apply to
and would repeal nonrecognition treatment for, among
others, involuntary conversions, for certain seller
reacquisitions of real property and for transfers of
property between spouses.

If enacted, AB 2640 could significantly increase the
California income tax of taxpayers who engage in
previously tax-deferred transactions. Also, because
AB 2640 creates a divergence between the Federal and
the California income tax laws that apply to those
taxpayers, enactment would probably increase the
complexity and cost of preparing their Federal and
California income tax returns.

Taxpayers should be aware that AB 2640 proposes
repeal effective for taxable years beginning on or
after January 1, 2010. The proposed statute raises
significant questions for California taxpayers who
have already engaged in exchanges of the sort covered
by the proposed legislation, and for those who plan
to do so before the ultimate legislative fate of AB
2640 is known.

As AB 2640 was introduced only three day ago, it’s
still much too early in the legislative process to
predict what, if any, traction it will have in the
Assembly and whether or in what form it will
ultimately become law.

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