CA Form 3840 and IRC 721

[Kh52]

CA Form 3840 and IRC 721

In 2017, I exchanged a rental property in California for multiple properties located out of state. Since then, I have been filing CA Form 3840 annually as required. In 2024, under code section 721, I contributed these properties to a partnership in exchange for partnership units equivalent to my original equity. As a result, I will receive K-1 forms to report on my tax return for 2024.

I have questions about how to reflect this event on Form 3840 for California purposes. Should I remove the properties from the form and include a statement? What specific information should I include in that statement when you remove the properties from Form 3840? Additionally, must I provide extra documentation to the California Franchise Tax Board (FTB) for the section 721 exchange? The California FTB does not give specific instructions regarding a section 721 exchange, so I am uncertain about the correct procedure.

[RobertB4444 · Accepted solution]

I would treat this as a new exchange and remove the properties from the 3840 and replace them with the partnership shares.  The whole point to filing the return every year is that when the final taxable event does occur California will receive it's cut.  Since the property is now a partnership interest that California is waiting to have sold that is what the 3840 should be tracking.

@Kh52