Demand letters for FTB 3840, California Like-Kind Exchanges, going out in December December 2019 Tax News

In February of 2019, we mailed letters to taxpayers who either failed to file, or filed an incomplete California Like-Kind Exchanges form (FTB 3840) for the 2016 tax year.  In June, follow-up letters were mailed to those who did not respond to our first request.

In December 2019, we will mail a Demand for California Like-Kind Exchange Information to taxpayers who did not respond to the two prior letters for the 2016 tax year.

If taxpayers do not respond within 30 days to the demand letter, we may open an audit for the tax year.  If the audit results in a notice of proposed assessment for the California like-kind exchange, a 25 percent penalty of the computed tax for the failure to provide information upon legal demand may be imposed (R&TC Section 19133).

California requires taxpayers who exchange real property located in California for like-kind property located outside of California to file a form FTB 3840. FTB 3840 must be filed in the year that the like-kind exchange occurs and every year thereafter, as long as the gain or loss has not been recognized. The reporting requirement generally continues until one of the following occurs:

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

Common errors that we find on FTB 3840 include:

  • Side 2 is transmitted blank and contains no data
  • A box on Question B has not been checked indicating whether the FTB 3840 is an initial, amended, annual, or final form
  • Vague, incomplete, or omitted property descriptions
  • Missing ownership percentages
  • Omitted California source deferred gain (Schedule A, Part I, Line 8)

You may search our website for FTB 3840 for additional information.