Like-Kind Exchange Information Reporting – Industry News

Posted on February 6, 2015 · Posted in Industry News

By Vicki Mulak, EA, CFP®

California Revenue and Taxation Code (R&TC) §§ 18031 and 24941 conform to Internal Revenue Code (IRC) § 1031, with regard to like-kind exchanges.  IRC § 1031 provides that no gain or loss is recognized if the taxpayer exchanges business or investment property solely for business or investment property of a like-kind.  A valid like-kind exchange has the benefit of deferred taxation, which means the taxpayer does not bear a tax liability at the time of the exchange.  The realized gain or loss is recognized when the property received is sold or disposed in a subsequent taxable transaction.

Beginning in 2014, AB 92 (Chapter 26, Statutes of 2013) now provides for an annual information reporting requirement for like-kind exchanges when California real property is exchanged for real property located outside of California (R&TC §§ 18032 and 24953) regardless of a an individual taxpayer’s residence status or an entity’s commercial domicile.  FTB3840, California Like-Kind Exchanges will also be required in scenarios where taxpayers exchange multiple assets involving both real and personal property located in California for like-kind property located outside of California.  At the current time, there is no requirement to file for exchanges of personal property only.

For like-kind exchange transactions of California real property executed in 2014 and later, taxpayers will now be required to file new form FTB 3840 as either an attachment to a California resident or nonresident return or an entity return, or as a stand-alone information return when no return is required for the year of the exchange and continuing for each subsequent taxable year in which the gain or loss attributable to the exchange has not been recognized.  If FTB 3840 is attached to a California tax return, no separate signature is needed.  If FTB 3840 is filed separately, the signature area on Side 1 should be completed.

Acceleration of Gain for Noncompliance

Taxpayers that fail to comply with the reporting requirement and fail to file FTB 3840 to confirm the continuance of the California-source deferred gain could become liable for the tax due on the deferred gain in an accelerated fashion.  FTB could make an estimate of the net income from the exchange using any available information, including the amount of deferred gain or loss reported in the year of the exchange, and may send a Notice of Proposed Assessment (NPA) for any tax, interest, and penalties due in the same manner as notice of proposed assessments are generally sent out for the failure to file any tax return. Similarly, taxpayers who fail to properly report the recognition of the California-source gain attributable to the exchange in the year of a subsequent taxable disposition of the replacement real property could also be contacted by FTB with an NPA for failure to file a return and ultimately report the taxable gain.

Vicki L. Mulak, EA, CFP® is a well-known tax law update and business entity presenter for NAEA, CSEA, other NAEA state affiliates and CSTC. She is the recipient of the 2012 NAEA Bill Payne Advocacy Award. In 2011, she received CSEA’s Distinguished Service Award and in 2006, the Thomas P. Hess Award. In 1996, she was named Small Business Administration’s Accountant Advocate of the Year. She serves on California’s FTB and EDD advisory committees and assists with CSEA-sponsored California legislation, testifying as needed. Since 1986, her Tustin, CA practice, American Financial and Tax, has specialized in both individual and small business tax preparation and planning.