Like-Kind IRC Section 1031 Property Exchange Reporting — Information Return Requirement
Effective January 1, 2014, individuals and business entities must file FTB 3840, California Like-Kind Exchanges, to report previously deferred California sourced gains or losses if they do both of the following:
- Perform like-kind exchanges of California property for property outside of California.
- Defer any gain or loss under Internal Revenue Code (IRC) Section 1031.
This applies to tax years that begin on or after January 1, 2014.
We hope to have the FTB 3840 available by December 31, 2014.
- Personal property exception
- Like Kind Exchanges that began in 2013 and ended in 2014
- Filing frequency
- Due date
- Filing information
- Calculate your gain or loss
- Credit when both California and another state tax the deferred gain
- If you do not file
- Questions and comments
You are not required to file FTB 3840 for like-kind personal property exchanges subject to Revenue and Taxation Code (R&TC) Section 18032 for the 2014 tax year.
We are currently evaluating whether like-kind exchanges of personal property should be subject to R&TC Section 18032. We will provide more information in the future, as needed. However, you must keep records of these exchanges and make them available upon request.
If you exchanged California relinquished property in December 2013, the exchange is not subject to R&TC Section 18032 and you are not required to file FTB 3840. R&TC Section 18032 applies only to exchanges where you relinquish California property on or after January 1, 2014.
However, if you performed a reverse like-kind exchange that started in 2013 where you relinquished the California property on or after January 1, 2014, the exchange is subject to R&TC Section 18032.
You acquired the replacement property in December 2013. You relinquished the California property in February 2014. You must file FTB 3840 to report the gain or loss from the exchange.
You must continue to file FTB 3840:
- As long as you defer the gain or loss.
- If you exchange the out-of-state replacement property with another out-of-state property as part of another exchange.
- Until you recognize the deferred California sourced gain or loss on a California return.
- Until the owner of the replacement property dies, eliminating the deferred California source gain or loss.
- Until you donate the replacement property to a non-profit organization.
FTB 3840 is due each year as long you have a filing requirement. The extended due date applies when you file the form with your California tax return, as appropriate, following the extended due date provisions.
See the table below.
|Taxpayer type||Due date||Extended Due date|
||April 15||October 15|
|Banks and Corporations||15th day of the 3rd month after the close of the fiscal year||7 months after the due date|
If you file a California Income Tax Return, attach FTB 3840 to your return.
If you do not have a California filing requirement, mail it to:
FRANCHISE TAX BOARD
PO BOX 1998
RANCHO CORDOVA CA 95471-1998
You can also efile FTB 3840, if you efile your California return.
The following examples show how to calculate California source gains.
Personal income taxpayer
Sue sold a California relinquished property (RQ) on February 19, 2014. She sold it for $4500 as part of a 1031 exchange. Sue's basis in the RQ was $1000. Sue calculates her gain by subtracting her basis amount ($1000) from the $4500 realized amount. Thus, Sue realized a $3500 gain when she sold the RQ. She buys an out of state property (RP) for $5000. Her adjusted basis in the RP is $1500 ($1000 carryover basis + $500 additional cash paid).
Assuming that Sue receives no other property (a.k.a. boot), she defers her $3500 California sourced gain. However, under the new California law, she must also annually report deferred California sourced gains on the FTB 3840.
Sue sells the RP on January 15, 2016, for $4500. She needs to report the lesser of the deferred California sourced gain or the actual gain from the sale of the RP. In Sue's case, she must report and pay tax on the $3000 California sourced gain on her 2016 California income tax return. She has to do this because her actual gain on the sale of the out of state RP ($4500 - $1500 = $3000) is less than the deferred amount.
Corporate franchise or income taxpayer
Corp A is an apportioning corporation. During the 2015 tax year, it conducts a 1031 exchange by relinquishing California property (RQ) and replacing it with property located outside California (RP). Corp A realizes $2 million gain, which it defers under IRC Section 1031.
- Business Property
- If the RQ is business property, and Corp A's 2015 California apportionment factor is 55%, then the California source gain amounts to $1.1 million ($2 million x 55%).
- Non-business Property
- If the RQ is non-business property, the entire $2 million gain is California sourced.
In both cases, regardless of whether the RQ is business or non-business, Corp A must file FTB 3840.
California may allow a credit for net taxes you pay to another state on any California source gains. See California Schedule S, Other State Tax Credit, for more information.
We may issue a Notice of Proposed Assessment to adjust your income for the previously deferred gains plus any applicable penalties and interest.
California R&TC Sections 18032 and 24953.
Email us any comments or questions about FTB 3840 filing compliance