Tracking California Tax when Trading Out of State

For purposes of determining California state income tax, any gain or loss from the sale or exchange of property located in California is attributed to California at the time the gain or loss is realized.  Even if you do not live in California, but exchange property located within California for property located outside California, the realized gain or loss is still attributed to California.

Example: As a resident of Texas, you exchanged a condominium located in California for like-kind property located in Texas. You realized a gain of $15,000 on the exchange that was properly deferred under IRC Section 1031. You then sold the Texas property in a nondeferred transaction and recognized a gain of $20,000.  The $15,000 deferred gain (the lesser of the deferred gain or the gain recognized at the time you disposed of the Texas property) has a source in California and is taxable by California. 

Payment of any tax is deferred until the replacement property is sold and the gain is recognized but taxpayors need to keep track of and report any deferred California gains and losses to the California Franchise Tax Board (FTB).  The California Revenue & Taxation Code requires that taxpayers who exchange a California relinquished property for replacement property outside of California must file a Form FTB 3840 with the FTB for the taxable year of the exchange, and for each subsequent taxable year in which the gain or loss from that exchange has not been recognized; generally until the California source deferred gain or loss is recognized. The form FTB 3840 is either attached to the California tax return, or is filed separately as a California information return if the taxpayer does not otherwise have a California filing requirement.

The Form 3840 is similar to the Federal Form 8824 and requires information about the taxpayor, information about the exchange transaction, and the gain/loss and basis information for the property sold.  The form allows for more than one relinquished property but if you have multiple like-kind exchanges involving California relinquished property and out of state replacement property, you should file a separate form FTB 3840 for each such exchange.


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