Compliance effort for FTB 3840, California Like-Kind Exchanges letters continues February 2021 Tax News

We are continuing compliance efforts for FTB 3840, California Like-Kind Exchanges. We previously contacted taxpayers who were identified as having or potentially having an FTB 3840 filing requirement in tax year 2016 and tax year 2017. The letters requested taxpayers to file FTB 3840 or to provide additional property information. 

Beginning in February 2021, we will mail follow up letters to those taxpayers who did not respond to our initial request. The follow-up letter will have a 30-day response time. Failing to respond to this letter may result in additional contact from the Audit Division.

We will also mail initial compliance letters for tax year 2018 beginning in March of 2021.

Taxpayers must report a like-kind exchange on California Like-Kind Exchanges (FTB 3840) if the following occurs:

  • One or more California real properties are exchanged for one or more real properties located outside of California; and
  • Any portion of the California sourced realized gain or loss is not recognized pursuant to an IRC section 1031 like-kind exchange.

FTB 3840 must be filed in the year the like-kind exchange occurs and every year thereafter as long as the gain or loss is deferred. The reporting continues until one of the following occurs:

  • The deferred California sourced gain or loss is recognized on a California return
  • The property is transferred through inheritance, eliminating the deferred California source gain or loss
  • The replacement property is donated to a non-profit organization

In addition, if the out-of-state replacement property is later exchanged for another property as part of a tax-deferred exchange, an FTB 3840 is still required because the gain or loss deferral continues.

Visit the Instructions for Form FTB 3840 California Like-Kind Exchanges on our website for additional information.