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.
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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.
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.
I have exactly the same situation except I have exchanged in 2024 one of the 4 out of state properties for a partnership interest (UPREIT 721) which were originally exchanged for a California rental property under 1031. I still have 3 out of state properties subject to CA 3840. How may I report on CA 3840 the acquisition of a partnership interest in exchange for contribution of my property interest to the partnership? Thanks.
All taxpayers, regardless of residence status or commercial domicile, who exchange real property located in California for like-kind property located outside of California, must file form FTB 3840 with their California tax return. TurboTax will prepare the form and include it with the California return.
Form FTB 3840 must be filed for the taxable year of the exchange and for each subsequent taxable year, generally until the California source deferred gain or loss is recognized on a California tax return.
To report the acquisition of the partnership interest in exchange for contribution of property interest, list the property received in the exchange on Form 3840, Part II, Line 9. Indicate if the property is located in California and the taxpayer's percentage of ownership.
Enter the full address where each property received is located. If the property received does not have a street address, then provide the assessor's parcel number, the county, and the state in which the property is located. Follow the step by step instructions in TurboTax.
If you exchange a California property received in a 1031 exchange for interest in a UPREIT, the exchange is still tax-deferred (see this Franchise Tax Board technical manual) but under IRC section 721, and you will no longer be able to perform subsequent 1031 exchanges with that interest. You will also be taxed when you sell your interest in the UPREIT.
See here for 2024 California information and instructions for the completion of Form 3840.
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