FTB 3840, California Like-Kind Exchanges, filing requirements and tips for correct reporting October 2018 Tax News

With October 15 right around the corner, this is a reminder that 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 that 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, line 7 through 20, respectively. In addition, Schedule A, Parts I, II, and III require California-specific information.

Tips for correct reporting

We've reviewed the 2016 FTB 3840 filings and a significant number of the forms filed were incomplete, partly due to the omission of the California-specific information. In the coming months, we will mail letters to taxpayers who filed incomplete FTB 3840 filings, requesting that they update their forms to include the California-specific details.

Common issues that we also found on FTB 3840 include:

  • A box on Question B has not been checked to indicate whether the FTB 3840 is an initial, amended, annual, or final form.
  • Vague, incomplete, or omitted property descriptions. FTB 3840 instructions require that the full address (or assessor's parcel number, county, and state) must be reported.
  • Missing ownership percentages.
  • Omitted California source deferred gain (Schedule A, Part I, Line 8).

For additional information regarding FTB 3840, go to ftb.ca.gov and search for FTB 3840.