Form FTB 3840: California Like-Kind Exchanges, Filing and Penalties

Form FTB 3840 is California’s annual information return for like-kind exchanges under IRC Section 1031 when you gave up California property and received replacement property outside the state. You file it with the Franchise Tax Board for the year of the exchange and every year afterward, until the deferred California-sourced gain is finally recognized on a California tax return.¹ The point is to let California follow appreciation that built up inside the state even after the investment moves to Nevada, Texas, or anywhere else.

Who Has to File

Two conditions trigger the filing requirement. You exchanged one or more California properties for like-kind property located outside California, and any part of the California-sourced realized gain or loss went unrecognized because it was deferred under Section 1031.² Both true, you file. There is no minimum dollar threshold.

The obligation reaches individuals, estates, trusts, general partnerships, limited partnerships, limited liability partnerships, LLCs, and corporations. The carve-out is for disregarded entities such as single-member LLCs that don’t file their own returns; in that case the owner files the form.¹

Residency is not a factor. A non-resident who has never lived in California but owned investment property there must file FTB 3840 if they defer gain by exchanging into out-of-state property. The authority is Revenue and Taxation Code Sections 18032 and 24953, which require the return and let the FTB estimate income and assess tax if you skip it.³

One recent change matters for planning. For taxable years beginning on or after January 1, 2025, California conforms to federal law limiting like-kind exchanges to real property. Personal property exchanges no longer qualify.²

Filling Out the Form

The form has Side 1 (Parts I and II) covering exchange details and gain calculations, plus Schedule A listing the properties given up and received. Before starting, pull your settlement statements, closing documents, original purchase records for the relinquished property, and any appraisals you used to establish fair market value.

Question B: Which Kind of Filing

Near the top of Side 1, Question B asks you to check a box: Initial FTB 3840 (the first year you file after the exchange), Annual FTB 3840 (each subsequent year the gain is still deferred), Amended FTB 3840, or Final FTB 3840 (the year the deferred gain is recognized). Get this right. The “Final” box is how you tell the FTB the filing obligation is ending.

Side 1, Part I: Exchange Information

Part I collects the transaction facts. Descriptions of the property given up and received, the date the relinquished property was originally acquired, the date it was transferred to the other party, and the date you received the replacement property. If a qualified intermediary was involved, note that too. These dates let the FTB verify the federal identification and closing deadlines were met.

Side 1, Part II: Realized Gain, Recognized Gain, Basis

Part II is the math. Line 10 asks for cash received, the fair market value of any non-like-kind property received, plus net liabilities assumed by the other party, reduced by exchange expenses.⁴ That is the boot, the non-qualifying consideration that usually creates the taxable slice of the exchange. Receive $50,000 in cash alongside the replacement property and that amount lands on line 10 and is generally recognized as taxable gain in the exchange year.

The remaining lines subtract the adjusted basis of the relinquished property from total consideration to reach the realized gain, then separate the recognized gain (usually equal to the boot) from the deferred gain that rolls into the basis of the replacement property. Line 19 is the deferred gain. That is the number the FTB will follow year after year until disposition.

Schedule A: Properties Given Up and Received

Schedule A, Part I lists each property you gave up. For every property, indicate whether it was in California, enter the full address (or the assessor’s parcel number and county if there is no street address), and state your ownership percentage. Then provide the consideration or sales price received, selling expenses (commissions, escrow fees, title insurance, loan charges), and the California adjusted basis.¹

California adjusted basis is not always the same as federal basis. Depreciation methods, special credits, and accelerated write-offs where California does not conform to federal law can produce a gap, and if you have been using a method California does not follow, you compute the California basis separately. FTB Publication 1001 covers those adjustments.¹

Line 8 of Schedule A, Part I asks for the California-sourced deferred gain. If everything given up was California property, this is the deferred gain from Side 1, Part II, line 19, adjusted for any California-federal differences. If you gave up properties in multiple states, calculate the deferred gain for each property separately and total only the amounts attributable to the California properties.¹ Attach a statement showing how you made the allocation.

Schedule A, Part II captures each replacement property received: address, whether the property is in California, and your ownership percentage. Received more than three properties in either Part I or Part II? Use additional copies of Schedule A and attach them all.

Withholding at Closing Is a Separate Form

Form FTB 3840 does not handle real estate withholding. When California real property changes hands, the buyer or intermediary generally must withhold 3⅓ percent of the sales price and remit it to the FTB. A qualifying 1031 exchange can exempt you from that withholding, but the exemption is claimed on Form 593, the Real Estate Withholding Statement, at closing.⁵

For a simultaneous exchange, the transfer is fully exempt as long as boot does not exceed $1,500. For a deferred exchange using a qualified intermediary, the initial transfer is exempt, but if you receive boot over $1,500 the intermediary withholds 3⅓ percent of the boot. If the exchange fails outright — missed identification or closing deadline — withholding of 3⅓ percent of the full sales price kicks in.⁵ Confirm your escrow officer or intermediary has the right Form 593 certification before closing. Fixing an erroneous withholding after the fact takes months.

Where and When to File

If you file a California tax return, attach FTB 3840 to it. Residents attach to Form 540; non-residents and part-year residents attach to Form 540NR; partnerships, LLCs, and corporations attach to their respective entity returns. If you e-file your California return, you can e-file FTB 3840 with it.²

If you have no other California filing requirement, which is common for non-residents whose only California connection is the exchanged property, sign and mail the standalone form to:⁶

Franchise Tax Board
PO Box 1998
Rancho Cordova, CA 95741-1998

The due date matches your California return: April 15 for most calendar-year individuals, or the 15th day of the fourth month after year-end for fiscal-year filers. Weekends and holidays push the date to the next business day, and any extension of time to file your return also extends the FTB 3840 deadline.

Filing Year After Year, and How to Stop

The obligation does not end with the exchange year. You file FTB 3840 every year the gain remains deferred, even in years you have no other California income.² For annual filings, check the “Annual FTB 3840” box in Question B and repeat the same Schedule A information reported on the initial form.

The obligation ends when the deferred gain is recognized on a California tax return, usually because you sold the replacement property in a taxable sale instead of rolling it into another exchange. In the year of that final sale, check the “Final FTB 3840” box, drop the sold property from Schedule A, and attach a written statement explaining that the replacement property was sold and the gain reported on your California return for that year.² That statement closes the loop with the FTB.

If the replacement property is itself exchanged in another 1031 transaction, the deferred gain carries forward into the new replacement property and the annual filings continue. Update Schedule A to reflect the new property while keeping the California-sourced deferred gain amount intact.

What Happens If You Don’t File

Skipping FTB 3840 is one of the more expensive filing mistakes available in California, because the exposure is not a flat penalty. It is the entire deferred tax bill coming due. Under R&TC Sections 18032 and 24953, if you fail to file the information return and do not file a California tax return, the FTB can estimate your net income from the information it has, including the full deferred gain, and issue a Notice of Proposed Assessment for the tax, plus penalties and interest.³

Interest compounds. The FTB’s underpayment interest rate for the period from July 1, 2025 through June 30, 2026 is 7 percent, and that rate runs back to the date the tax should have been paid.⁷ On a large deferred gain, years of compounding turn into a substantial bill on their own.

The harshest feature is the statute of limitations, or the absence of one. When no California return has been filed for a tax year, the FTB generally has no time limit on issuing an assessment. A non-resident who did a 1031 exchange in 2015 and never filed FTB 3840 or a California return could hear from the FTB a decade later with a full assessment attached. Filing the form each year, even when nothing has changed and it feels pointless, is what starts the clock on the statute of limitations and keeps a surprise bill from landing years later.

1
Franchise Tax Board. 2025 Instructions for Form FTB 3840 California Like-Kind Exchanges
2
Franchise Tax Board. Reporting Like-Kind Exchanges
3
California Legislative Information. California Revenue and Taxation Code RTC 18032
4
Franchise Tax Board. FTB 3840 2025 – California Like-Kind Exchanges
5
Franchise Tax Board. 2026 Instructions for Form 593 Real Estate Withholding Statement
6
Franchise Tax Board. 2024 Instructions for Form FTB 3840 California Like-Kind Exchanges
7
Franchise Tax Board. Interest and Estimate Penalty Rates