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Reporting Like–Kind Exchanges under IRC Section 1031 – Information Return Requirement

For tax years that begin on or after 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 the individuals or business entities do both of the following:

Personal property exception

You are not required to file FTB 3840 for like-kind personal property exchanges subject to Revenue and Taxation Code (R&TC) Section 18032.

However, you must keep records of these exchanges and make them available upon request.

Filing frequency

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.

Due date

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 and follow the applicable links to determine the due date and extended due date of your California income tax return and FTB 3840.

Taxpayer type Due dates
Individuals and Fiduciaries https://www.ftb.ca.gov/individuals/due-dates.shtml
All Business Entities (including Partnerships, LLCs, Corporations, and S-Corporations) https://www.ftb.ca.gov/businesses/due-dates.shtml

Filing information

Mail

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

e-file

If you efile your California return, you can also efile FTB 3840.

Calculate your gain or loss

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 (i.e. boot), she defers her $3500 California source gain. Under California law, Sue must annually report deferred California source gains on FTB 3840.

Sue sells the RP on January 15, 2016, for $4500. She needs to 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 $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 $3500 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 is $1.1 million ($2 million x 55%).
Non-business Property
If the RQ is non-business property, the entire $2 million gain is California source.

In both cases, regardless of whether the RQ is business or non-business, Corp A must file FTB 3840 until the appropriate amount of gain is recognized for California tax purposes ($1.1 million if the property is business property, and $2 million if the property is non-business property).

Selling or exchanging property in 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 will also need to attach a new FTB 3840 reporting that exchange. Below are some examples.

Example 1: A taxpayer exchanges one property located in California for three 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 they exchanged one of the 2015 replacement properties 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.

Credit when both California and another state tax the deferred gain

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.

If you do not file

We may issue a Notice of Proposed Assessment to adjust your income for the previously deferred gains plus any applicable penalties and interest.

Law

California R&TC Sections 18032 and 24953.

Questions and comments

Email us any comments or questions about FTB 3840 filing compliance.

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Last Updated: 02.28.2019

 

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