If you complete a 1031 exchange involving California property, the California like-kind exchange reporting requirements oblige you to file Form FTB 3840 with the Franchise Tax Board for the year of the exchange and every year afterward until the deferred gain is recognized on a California return. The obligation is tied to Revenue and Taxation Code Section 18032, applies most consequentially when you swap California real estate for replacement property outside the state, and can last decades. Miss it, and the FTB can treat the entire deferred gain as currently taxable.
What California Requires You to Report
Section 18032 is the tracking statute. It applies whenever you exchange California-source real property for like-kind replacement property located outside California and defer the gain under IRC Section 1031. The rule has been in effect for exchanges in taxable years beginning on or after January 1, 2014.1California Legislative Information. California Revenue and Taxation Code RTC 18032
The statute requires you to file an information return with the FTB for the year of the exchange and every subsequent year the gain remains unrecognized.1California Legislative Information. California Revenue and Taxation Code RTC 18032 Practitioners call this the clawback rule. California’s taxing authority follows the deferred gain no matter where the replacement property sits or where you eventually move, and the annual filing is what keeps the FTB aware of the deferred amount and the asset’s location year after year.
The reporting obligation does not apply if you exchange California property for other California property, because the gain stays within the state’s taxing reach through the replacement asset itself. It also does not apply when both properties are outside California, since no California-source gain was deferred.
What Qualifies for the Deferral in the First Place
California conforms to the federal Tax Cuts and Jobs Act limitation: only real property held for business use or investment qualifies for like-kind exchange treatment on your state return.2State of California Franchise Tax Board. 2024 Instructions for Form FTB 3840 California Like-Kind Exchanges Equipment, vehicles, and other personal property are out. A narrower income-based exception that let lower-AGI taxpayers still exchange personal property under the pre-TCJA rules ended for taxable years beginning on or after January 1, 2025, so all California like-kind exchanges are now real-property-only regardless of income.3Franchise Tax Board. Reporting Like-Kind Exchanges
The federal timing rules carry over at the state level. Both properties must sit within the United States. You have 45 days from the sale of the relinquished property to identify replacements in writing, and the replacement must be acquired within 180 days of that sale or by the extended due date of your tax return for that year, whichever comes first.4Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031 Most deferred exchanges use a qualified intermediary to hold proceeds until closing.
Filing Form FTB 3840
Form FTB 3840, “California Like-Kind Exchanges,” captures the exchange details, calculates realized and recognized gain, and tracks your replacement property’s basis. Side 1 covers the exchange information (Part I) and the gain and basis calculations (Part II). Side 2 is Schedule A, listing properties given up and received; Part III of Schedule A is where you allocate the California-source deferred gain that the FTB will eventually tax.5Franchise Tax Board. 2025 Form 3840 California Like-Kind Exchanges
File Form FTB 3840 for the taxable year of the exchange and for every subsequent year until the deferred gain is fully recognized on a California return. Attach it to your California tax return. If you are a nonresident who does not otherwise need to file a California return, submit Form FTB 3840 as a standalone California information return, signed and mailed to the FTB.6Franchise Tax Board. 2025 Instructions for Form FTB 3840 California Like-Kind Exchanges You do not need to file a full nonresident return (Form 540NR) just for the tracking; the standalone 3840 satisfies the requirement.
Keep separate records showing exactly how much of your deferred gain is California-source. This figure flows through Part III of Schedule A each year until recognition. If you acquired the property before California fully conformed to certain federal rules, your state and federal basis figures may differ, and separate tracking is essential for accurate depreciation and eventual gain calculations.
The annual obligation ends in one of two ways. You sell or otherwise dispose of the replacement property and recognize the deferred gain, or you do another Section 1031 exchange that moves the replacement property back into California, bringing the gain within the state’s direct taxing reach.
Due Dates
Because Form FTB 3840 attaches to your California return, its deadline follows the return’s deadline. For the 2025 tax year (filed in calendar year 2026), the extended due dates are:
- Individuals, estates, and trusts: October 15, 2026
- C corporations: November 16, 2026
- S corporations: September 15, 2026
- Partnerships: October 15, 2026
When a due date falls on a weekend or holiday, the deadline shifts to the next business day.6Franchise Tax Board. 2025 Instructions for Form FTB 3840 California Like-Kind Exchanges
Penalties for Skipping the Filing
This is where the risk is routinely underestimated. If you fail to file Form FTB 3840 and also fail to file a California tax return, the FTB can estimate your net income using any available information, including the full amount of the deferred gain, and propose an assessment for the tax owed plus interest and penalties.1California Legislative Information. California Revenue and Taxation Code RTC 18032 In practical terms, skipping the filings can trigger the FTB to treat the entire deferral as if it never existed, accelerating the full tax bill into the year of the missed filing.
California taxes capital gains as ordinary income, with rates reaching 13.3% at the top bracket. An investor who deferred $500,000 of gain on a Los Angeles office building by exchanging into a Texas commercial property still owes California tax on that $500,000 when the Texas property is eventually sold, even after years of Texas residency. Nonresidents are especially exposed to a missed filing. A former California investor who moved to a no-income-tax state and forgot about the annual 3840 might first hear from the FTB years later through a Notice of Proposed Assessment.3Franchise Tax Board. Reporting Like-Kind Exchanges By then, interest alone can be substantial.
Serial Exchanges
If you roll the out-of-state replacement property into yet another Section 1031 exchange, the California tracking obligation carries forward. The deferred California-source gain does not disappear just because you keep exchanging. You continue filing Form FTB 3840 each year, now reporting the new replacement property.
In serial exchanges, the recognized gain for California purposes will be tied to the recognized gain at the federal level, which can simplify tracking for practitioners handling chains of exchanges.7Franchise Tax Board. IPM2 Approach to Regulations The filing obligation itself persists until the California-source gain is either recognized or the replacement property returns to California.
How the Obligation Ends at Death
Under general federal rules, when a property owner dies, heirs receive the property with a basis stepped up to its fair market value at the date of death, effectively eliminating the built-in deferred gain from prior 1031 exchanges. California generally conforms to this treatment, which means the deferred California-source gain tracked under R&TC 18032 should be extinguished when the property passes to heirs, and the annual Form FTB 3840 obligation with it.
That makes estate planning a meaningful endpoint for the tracking cycle. An investor who chains together several 1031 exchanges over decades, accumulating a large deferred gain, can pass the replacement property to heirs at death with no California tax ever collected on that gain.