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California Franchise Tax Board (FTB) Still Working on New Like-Kind Exchange Form

This article is reproduced with permission from Spidell Publishing, Inc.

Beginning January 1, 2014, taxpayers who complete a like-kind exchange of California property for property located out of state are required to file Form 3840, California Like-Kind Exchanges, an information return, with the FTB. The draft form is available on the FTB website at:

https://www.ftb.ca.gov/forms/drafts/14_3840draft.pdf

The filing requirement
The information return must be filed for the year in which the exchange is completed and each subsequent year that the gain or loss is deferred, regardless of whether the seller/exchanger has any other California franchise tax, income tax, or information return filing requirement.

The FTB may estimate net income — using any available information — and assess tax, interest, and penalties if:

  • The taxpayer fails to file an information return; and
  • A required tax return is not filed.

The new rules apply to exchanges that occur in taxable years beginning on or after January 1, 2014; thus, the taxpayers will not be required to file the new information return for exchanges where the original property was relinquished in 2013. However, the FTB has informed us that for reverse exchanges that began in 2013, where the original property was not transferred until 2014, the information return will be required.

Example:
Fred exchanged an apartment building in California for another apartment building in Texas through a reverse Internal Revenue Code (IRC) Section 1031 exchange. In December 2013, Fred identified the Texas apartment building he wanted and purchased it. At that time, he had not yet sold his California apartment building. Fred sold his California building in January of 2014 and successfully completed his IRC Section 1031 exchange.

Because Fred did not relinquish his California property until 2014, he is subject to the information reporting requirement.

In addition to the form, the FTB is working on FAQs on this topic, and here are some of the answers they have provided:

Q: If I continue to be a California resident after exchanging California property for out-of-state property, can this form be filed with my California Form 540?
A: Yes.

Q: Will the due date of the new information form be the same as the income tax return due date (generally April 15)?
A: Yes, the due date for the information return will be the due date of the income tax return.

Q: Must I track and identify replacement property if that property is disposed of in a subsequent exchange for property outside of California?
A: Yes. You will be required to continue reporting, although you have acquired a new replacement property.

Q: Will the form have a “final” checkbox to indicate no future forms need to be filed? For example, I have disposed of the property and recognized all deferred gain, or the replacement property is passed to beneficiaries upon the death of the owner.
A: Yes.

For more information about this article, please contact our tax professionals at taxalerts@windes.com or toll free at 844.4WINDES (844.494.6337).

 

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