California Like-Kind Exchanges (FTB 3840) letters July 2020 Tax News

Beginning in July through August 2020, we are mailing letters to taxpayers who either failed to file or filed an incomplete FTB 3840 for 2017. The letters request that taxpayers file FTB 3840 to include California-specific details. This is similar to requests that we made for the 2016 tax year which were mailed during late 2019 and early 2020. Taxpayers who were not previously identified as having an FTB 3840 filing requirement for the 2016 tax year may also receive a letter at this time.

As mentioned in our October 2018 Tax News in the article, FTB 3840, California Like-Kind Exchanges, Filing Requirements and Tips for Correct Reporting, California requires taxpayers to file form FTB 3840, California Like-Kind Exchanges, when they exchange real property located in California for like-kind property located outside of California. This requirement began with tax years beginning on or after January 1, 2014.

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.

The instructions for FTB 3840 require that the federal amounts reported on Part III, line 12 through line 25 of federal Form 8824 be entered on FTB 3840, Part II, and line 7 through 20, respectively. In addition, Schedule a, Parts I, II, and III require California-specific information.

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)

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