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The Jobs and Growth Tax Reconciliation Act of 2003

On May 29, 2003, the long term capital gains tax rate was reduced from 20% to 15%. This change affects all property sales taking place after May 5, 2003. This is a bonus for investors who do not wish to exchange. Remember however, that if you do not exchange, you are still required to pay the following items: 1) Capital Gains Tax at 15%, 2) State taxes estimated at 8-10%, and 3) Depreciation recapture at 25% of all depreciation taken since you purchased the property. If you exchanged into the property you are now selling, keep in mind, your tax liability is affected by all previous transactions in the chain of ownership. Check with your tax advisor to verify the tax consequences of not exchanging.

Visit the IRS Press Release on this law.

California State Withholding

Effective January 1, 2003, all non-owner occupied real estate sold in California is subject to withholding. This means that the escrow company is required to withhold 3 1/3% of the sale price and send this money to the State as prepayment of your State income taxes due on this sale. By completing a Section 1031 Exchange, there is no withholding requirement as long as all exchange proceeds are spent on a replacement property. If you do not use all the proceeds on your purchase, then the accommodator assumes the responsibility for sending 3 1/3% of the leftover funds or "boot" to the state. If you cancel your exchange after the accommodator receives your exchange proceeds, the accommodator then sends the full 3 1/3% to the State prior to releasing any funds to you.