Reporting Like-Kind Exchanges to California

• December 12, 2023
• Carey M. Heyman, CPA

The State of California generally conforms to Internal Revenue Code Section 1031, as revised by the Tax Cuts and Jobs Act of 2017.¹  Like-kind exchanges are reported on California Form 3840 when there is an exchange of one or more California real properties for one or more real properties located outside of California; and if any portion of the California sourced realized gain or loss is not recognized.

A taxpayer must file California Form 3840 for every taxable year in which the gain or loss is deferred, in conjunction with the filing of the California tax return.  Exchanging an out-of-state replacement property for another out-of-state property as part of subsequent Section 1031 exchange does not relieve the taxpayer of the filing obligation.

The filing of California Form 3840 can cease when the taxpayer:

• Reports and pays tax to California on the deferred gain or loss;
• Passes away, which would eliminate the deferred California source gain or loss under); or
• Donates the replacement property to a non-profit organization.

When one of the replacement properties reported on California Form 3840 is exchanged or sold in a taxable transaction, the taxpayer should remove that property from the California Form 3840 in the year of sale, report the exchange or sale on the California tax return and then attach a statement that explains why the property was removed from California Form 3840. When property is exchanged, the taxpayer will also need to attach a new California Form 3840 that reports that like-kind exchange.  

Like-kind exchanges can often involve the relinquishment of multiple properties or the purchase of multiple replacement properties.  In years following these like-kind exchanges, some properties may be sold or used in future like-kind exchanges.  In situations like these, an additional explanation or supplemental California Form 3840 is recommended.

If the taxpayer fails to file the California Form 3840 or a California tax return, the Franchise Tax Board may issue a Notice of Proposed Assessment to adjust the taxpayer income for previously deferred gains, plus any applicable penalties and interest.

¹  For exchanges completed after January 10, 2019, exchanges are limited to real property unless the taxpayer meets the provision of Revenue and Taxation Code Sections 19031.5(b) or 24941.5(b).

Source: Franchise Tax Board

 

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