Final CA form 3840

[Pammer]

I have a 1031 exchange from CA to another state.  I filed the initial form 3840 and the annual form thereafter.  The replacement property has sold and I know CA wants the tax on the deferred gain.  When I click the Final FTB 3840 in Proseries, nothing happens and I cannot find any further instructions besides attaching a statement explaining how the property was disposed.  Do we have to manually enter the data as a sale of business property on the CA return?

[Just-Lisa-Now-]

I "think" you need to prepare the whole 540, not just the 3840 and the 540 will start off with the AGI from federal.   You can use the non-resident allocation worksheet at the bottom of the Fed Info worksheet to make any adjustments to the CA income that are needed just like you would have if the rental had sold outright without a 1031 exchange.

[Pammer]

Lisa,

There are no capital gains on the federal since the property was exchanged in a prior year.  You can file the 3840 by itself if a CA tax return is not required for the non-resident.  So it doesn't make sense that I would need to prep the federal and then the 540-NR and then the deferred gain would be released from the 3840.

[BobKamman]

I don't understand why there are no gains on the federal, if the property was sold.  What happened to the deferred gain?  

[Pammer]

My bad.  There are gains on the replacement property sold.  So these gains would release the CA deferred gains on the relinquished property?  I wanted to keep the gains separate as CA should only tax the original property's deferred gain.  The replacement property is in another state.  Are you saying that CA wants to tax the gains on the property in another state too?

[BobKamman · Accepted solution]

No, California just wants the tax on the California gain that was deferred.  Let's say the basis was $100K, it was exchanged for a property worth $200K, which was then sold for $300K.  You owe federal tax on $200K but California tax on only the $100K that escaped tax in the first transaction.  I can see all kinds of problems with this type of deal:  What if improvements were made to the replacement property for $50K, but then it was sold for only $220K?  You're lucky if you don't have to deal with such issues. 

I would call this a 4797-type puzzle.  The best way to complete a 4797 is to know before you start what answer you should get, and then make sure all the lines lead to that result.  And is California demanding an e-filed return?  How much time does it take to complete two pages on a fillable pdf, put it in an envelope with a check and mail it with a postage stamp?  

[Pammer]

Bob,  

I appreciate your responses.  I should be able to allocate only the deferred gains to CA.  CA doesn't make anything easy.   If your payment is more than $10,000, you have to pay electronically.  If you try to mail a check, they penalize you.  Don't even get me started on the PTE and the form 592s with the group return - what a hassle!

[sjrcpa]

But you can make the payment online at CA's website.

[Pammer]

In Proseries, I posted the sale of the replacement property (non-CA) and want to release the deferred gain on the relinquished property (in CA) on the CA return for a partnership.  The 1031 gains from the replacement property shows on the CA return but not the deferred gain.  I clicked final for the form 3840 but I had to manually enter and override to report the deferred gain on the partnership's CA return.  Ugh!