A Section 1031 like-kind exchange of property is a great way to defer a taxable gain. However, after years of seeing California property being exchanged for out-of-state property, the California Franchise Tax Board (FTB) realized how much tax was being lost as the deferred gains were eventually recognized outside of California.
Now California has come up with a new way to claw back that lost tax – required annual reporting with the FTB for as long as you defer the gain. The California Like-Kind Exchange information form, FTB 3840, is required to be filed by anyone, resident or non-resident, who exchanges (relinquishes) California property for out-of-state property and has, as a result, deferred California sourced gain. Even if you do not otherwise have a filing requirement for California, you must file this informational form every year.
An apportioning corporation calculates California-sourced deferred gain differently depending upon whether it is relinquishing business or non-business property. The annual California Like-Kind Exchange information return must be filed in either case.
The penalty for not filing the annual form is a tax assessment based on the assumption that you realized the gain in that year, plus penalties and interest.
When can you stop filing FTB 3840 annually? When you have either donated the property to a non-profit or have disposed of the replacement property in a taxable transaction, recognizing the California-sourced gain on a California tax return. (Replacing the out-of-state property for another out-of-state property in another tax-free exchange will not stop your reporting requirement.) This reporting requirement became effective January 1, 2014. FTB 3840 can be filed as an attachment to a California return but must be mailed in for those who have no other California filing requirement.
For more information about this new reporting requirement, contact LSL CPAs at 714.569.1000.
By Carolyn Bryant, CPA
