Contributed By Allen Matkins Leck Gamble Mallory & Natsis LLP
California counties and most cities levy a transfer tax whenever 50% or more of the interest in a property is sold. It will almost always apply to a fee-title change of any real property. In most jurisdictions, sellers pay the transfer tax, which ranges from 11 to 56 basis points in most California jurisdictions. While an outlier, the City and County of San Francisco impose transfer taxes of 300 basis points, or 3% of the purchase price.
An exception occurs under an IRC 1031 exchange, which allows an investor to defer revenue recognition and avoid capital gains taxes if the proceeds are invested into replacement, like-kind property within 180 days.
If an investor desires to acquire a replacement property before selling its current investment property, it can engage in a reverse exchange. Essentially, this involves lending funds to an “accommodator,” which purchases the property the investor would like to acquire, holding it until the investor can sell its current property and then using the subsequent sale proceeds to pay off the loan. In that case, to avoid a second set of transfer taxes, the investor then provides documentation to the county tax authorities to establish the reverse exchanges in a single transaction, done in two stages.