MyFTB accountReporting like-kind exchanges IRC section 1031 and FTB 3840
Overview
Generally, a like-kind exchange occurs when real 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.
California generally conforms to Internal Revenue Code (IRC) section 1031 as revised by the Tax Cuts and Jobs Act of 2017 (TCJA) for exchanges initiated after January 10, 2019. TCJA limited like-kind exchanges to real property. However, California continues to allow 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 real properties for one or more real 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.
Visit Instructions for Like-Kind Exchanges (FTB 3840) 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.
Examples
The following examples show how to calculate California source gains.
Individual
Scenario: Sue sold a California property on February 19, 2017. She sold it for $4,500 as part of an IRC section 1031 exchange. Sue's basis in this relinquished property (RQ) was $1,000. Sue calculates her gain by subtracting her basis amount ($1,000) from the $4,500 amount realized.
Thus, Sue realized a $3,500 gain when she sold the RQ. She buys an out-of-state replacement property (RP) for $5,000. Her adjusted basis in the RP is $1,500 ($1,000 carryover basis + $500 additional cash paid). Assuming Sue receives no other property (i.e. boot), she defers her $3,500 California source gain. Under California law, Sue must annually report the deferred California source gain on FTB 3840.
Sue sells the RP on January 15, 2019, for $4,500. She must report to California the lesser of the deferred California source gain or the recognized gain from the sale of the RP. In Sue's case, she must report and pay tax on the $3,000 California sourced gain on her 2019 California income tax return because her actual gain on the sale of the out-of-state RP ($4,500 - $1,500 = $3,000) is less than the deferred $3,500 amount.
Multiple property exchanges
Scenario: 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 2015 and files FTB 3840 for each year. The taxpayer properly allocated the deferred gain between each replacement property on FTB 3840. In 2017, the taxpayer sold one of the replacement properties for a gain. The taxpayer should report the gain, file FTB 3840 with the sold property removed from the form and attach a statement explaining that the replacement property was sold and reported on the taxpayer's 2017 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 under the provisions of IRC section 1031.
The taxpayer should continue to file FTB 3840 for the replacement properties that remain from the 2015 exchange, with the property exchanged in 2017 being removed from FTB 3840. The taxpayer should file a second FTB 3840 listing the property exchanged in 2017 as the relinquished property.
The portion of the 2015 deferred gain relating to the property exchanged in 2017 should be reflected in this second FTB 3840. The taxpayer should include a statement explaining that one of the 2015 replacement properties was exchanged for new replacement property.
The taxpayer’s obligation to report California deferred gain does not cease under the statute when the taxpayer exchanges an out-of-state replacement property for other property, regardless of whether or not that property is located outside California.