Reporting like-kind exchanges Internal Revenue Code section 1031 and FTB 3840
Overview
Generally, a like-kind exchange occurs when property, used for business or held as an investment, is exchanged solely for other business or investment property that is the same type or “like-kind” and gain or loss is deferred.
In general California law conforms to Internal Revenue Code (IRC) as of January 1, 2025. For taxable years beginning on or after January 1, 2025, like-kind exchanges are limited to real property.
For exchanges initiated after January 10, 2019, and completed before January 1, 2025, California allowed like-kind exchanges for personal property for individuals with adjusted gross income of under $250,000 (or $500,000 for taxpayers filing as head of household, surviving spouse, or married filing jointly).
Filing requirements
You must report the like-kind exchange on California Like-Kind Exchanges (FTB 3840) if both of the following occur:
- An exchange of one or more California properties for one or more properties located outside of California.
- Any portion of the California sourced realized gain or loss is not recognized.
Form FTB 3840 must generally be filed for the taxable year of the exchange and for each subsequent taxable year until the California source deferred gain or loss is recognized. Attach form FTB 3840 to your California tax return, or file separately as a California information return if you do not otherwise have a California filing requirement. Visit when to file for more information.
If you do not file the FTB 3840 and a tax return, we may issue a Notice of Proposed Assessment to adjust your income for the previously deferred gains plus any applicable penalties and interest.
Multiple property exchanges
Like-kind exchanges often involve the sale of multiple relinquished properties or the purchase of multiple replacement properties. In years subsequent to these exchanges, some properties may be sold or used in future exchanges. Completing FTB 3840 in these situations may require a supplemental FTB 3840 or explanation.
When one of the replacement properties reported on FTB 3840 is exchanged or sold in a taxable transaction, taxpayers should remove that property from FTB 3840 in the year of sale, report the exchange or sale on their tax return and attach a statement noting why the property was removed from FTB 3840. When property is exchanged, the taxpayer should also attach a new FTB 3840 reporting that exchange. Below are some examples.
Example 1: A taxpayer exchanges one property located in California for 3 properties located in other states in 2023 and files FTB 3840 for each year. The taxpayer properly allocated the deferred gain between each replacement property on FTB 3840. In 2025, the taxpayer sold one of the replacement properties for a gain. The taxpayer should report the California source gain, and file FTB 3840 removing the sold property from the form and attaching a statement explaining that the replacement property was sold and reported on the taxpayer’s 2025 tax return.
Example 2: The facts are the same as in Example 1, except instead of selling one of the replacement properties, the taxpayer exchanged one of the out-of-state replacement properties for another property.
The taxpayer should continue to file FTB 3840 for the replacement properties that remain from the 2023 exchange, removing the property exchanged in 2025 from FTB 3840. The taxpayer should file a second FTB 3840 listing the property exchanged in 2025 as the relinquished property.
The portion of the 2023 California source deferred gain relating to the property exchanged in 2025 should be reflected in this second FTB 3840. The taxpayer should include a statement explaining that one of the 2023 replacement properties was exchanged for new replacement property.
The taxpayer’s obligation to file FTB 3840 reporting California source deferred gain does not cease under the statute when the taxpayer exchanges an out-of-state replacement property for other property in a like-kind exchange, regardless of whether or not that property is located outside California. The taxpayer's obligation to file FTB 3840 continues until the California source deferred gain or loss from the exchange has been recognized.
Visit Instructions for Like-Kind Exchanges (FTB 3840) (coming soon) for more information.
How to file
- Franchise Tax Board
PO Box 1998
Rancho Cordova CA 95741-1998 - E-file
- If you e-file your California return, you can also e-File FTB 3840.
Visit file online for your e-file options.