By Mayer Nazarian and Geoffrey A. Weg

Recently, the California Franchise Tax Board announced the most common tax audit issues affecting Individuals, Pass-Through Entities and Corporations. 

Over the next few weeks we will briefly highlight these areas.  

This week, we will discuss the top issues for Personal Income Taxpayers.

1. Like-Kind-Exchange Transactions - Sale of Property Through an IRC 1031 Exchange with incorrect treatment of boot, identification of property, and/or "drop and swap transactions.”

2. Securities Transactions - Overstated stock basis, unreported option premium income, and regulated futures contracts. 

3. Rental Real Estate Losses - The treatment of the real estate activity as passive or nonpassive may vary for Federal versus State tax purposes, therefore, the classification selected by the taxpayer must be appropriate. (Generally, losses from passive activities, including rental real estate, may be deducted only up to the amount of income from passive activities. Any excess loss is carried forward to the following year or years until the interest in the activity is disposed in a fully taxable transaction. In some cases, a taxpayer may classify rental activities as nonpassive for federal purposes. However, for California purposes rental activities are generally considered passive, with a few exceptions.) 

4. Residency - Residency status for state tax purposes is based upon the taxpayer's specific situation which includes consideration of where the taxpayer has the closest connections and whether or not he/she receives substantial benefits and protection from the state. 

Please contact our Tax and Wealth Planning attorneys for consultation or assistance in the identification, clarification or resolution of these issues. 

Part two will be published next week.