Tax: New California Filing Requirement For Tax-Deferred Like-Kind Exchanges

December 12, 2014

Effective for 2014, taxpayers who exchange real property located in California for like-kind properties located outside of California in a tax-deferred like-kind exchange will need to file an annual information return with the State of California. A new California tax form, Franchise Tax Board ("FTB") Form 3840, California Like-Kind Exchanges, will be utilized to report the exchange and a separate FTB Form 3840 is required for each exchange completed.

The FTB is still finalizing the new form but will require information similar to what is reported on Internal Revenue Service Form 8824, Like-Kind Exchanges, as well as (a) specific information for each property given up including location, ownership percentage, amount of realized gain (or loss), and total California source deferred gain, (b) detailed information for each property received including location, whether the property is located in California, and ownership percentage, and (c) the allocation of total California source deferred gain from the property(ies) given up to the property(ies) received.

All individuals and business entities, regardless of their residency status or commercial domicile, whose tax-deferred like-kind exchange includes real property located in California exchanged for real property located outside of California, are subject to the new filing requirement. The new FTB form is filed with their California tax return. If the taxpayer is not otherwise required to file a California tax return, the new California form will be filed separately as an information return. The new California form will be filed for the year of the tax-deferred like-kind exchange and each successive tax year until the deferred gain or loss is recognized. If a taxpayer fails to file the new California form, the FTB may issue a Notice of Proposed Assessment to recognize the previously deferred gains plus penalties and interest.

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