California 1031 Exchange Clawback: FTB 3840 Rules and Math (2026)

The statute is section 18032, and it is short

Most pages that rank for “1031 exchange California” call this the clawback and describe it in a paragraph. The rule itself is four subdivisions of the Revenue and Taxation Code (R&TC), added by AB 92 (Stats. 2013, ch. 26) and effective June 27, 2013:

• (a) The duty. If gain from the exchange of California property is not recognized because of section 1031, and the property received is outside California, the taxpayer “shall file an information return with the Franchise Tax Board 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” (R&TC 18032(a)).
• (b) The consequence. If you file neither that return nor a tax return, the FTB “may make an estimate of the net income, from any available information, including the amount of gain described in subdivision (a)” and propose tax, interest and penalties under section 19087.
• (c) The FTB's rules for the form are exempt from the state's Administrative Procedure Act.
• (d) The start date. Exchanges in taxable years beginning on or after January 1, 2014.

Section 24953 repeats the text word for word for the Corporation Tax Law. California conforms to the federal exchange rules through R&TC 18031, which adopts subchapter O of the Internal Revenue Code (where sections 1031 and 1014 sit) “except as otherwise provided.”

Section 18032 does not itself say California may tax a nonresident on the old gain. That comes from the source rules: a nonresident's California income is “only the gross income from sources within this state” (R&TC 17951(a)), and the FTB's position, printed in the 2025 Form 3840 instructions, is that the source of gain from California property “is determined at the time the gain or loss is realized” and “is preserved without regard to when such gain or loss may be recognized.” The annual form is how the FTB keeps track of a gain it says is already Californian (our reading).

Correction to a common citation. R&TC 18031.5 is not the clawback. It is California's adoption of the 2017 federal change that limited section 1031 to real property, and it has a California twist covered below.

Form FTB 3840, field by field

Form FTB 3840 (“California Like-Kind Exchanges”) is two pages. The first copies the federal Form 8824; the second, Schedule A, is the California part. The instructions tell you to enter the federal Form 8824 lines 12 to 25 on 3840 lines 7 to 20.

When it is due: with the return. For calendar-year 2025 individuals, estates and trusts that was April 15, 2026, or October 15, 2026 on extension; partnerships and S corporations, March 16, 2026. If you have no other California filing requirement, the form is signed and mailed alone to Franchise Tax Board, PO Box 1998, Rancho Cordova, CA 95741-1998. One form per exchange.

The FTB does chase these. Its February 2021 Tax News said it had contacted taxpayers who had or might have had a filing requirement for tax years 2016 and 2017, would mail follow-up letters with a 30-day response time, and would begin letters for tax year 2018 in March 2021; not answering “may result in additional contact from the Audit Division.”

A worked example: $1.2 million of California gain into Texas

Our own illustration, with round numbers, a married couple filing jointly, and the gain as their only income in the year of each sale. It ignores depreciation on the replacement (which would raise the federal gain, not the California-sourced cap), selling costs and federal tax. California rates are the FTB's 2025 joint schedule (Schedule Y), because 2030 brackets do not exist yet; the brackets are indexed every year, so the 2030 figures will differ.

2025, the exchange. They sell a California rental for $2,000,000 with a California adjusted basis of $800,000 and buy a Texas property for $2,100,000, adding $100,000 of cash. Realized and deferred gain: $1,200,000. Basis in Texas: $900,000 ($800,000 carried over plus $100,000 added, the same method as the FTB's own example). On the 2025 return they file an Initial FTB 3840 with $1,200,000 on Schedule A line 8 and the full amount allocated to the Texas property on line 10. Had they simply sold, California would have taxed the $1,200,000 at $112,132.27 plus $2,000 of the 1% tax over $1,000,000 = $114,132.27 (our arithmetic: $77,276.52 plus 11.30% of the amount over $891,542).

2026 to 2029. An Annual FTB 3840 every year, repeating the original numbers. In 2027 they move to Texas, which has no state income tax. The filing duty does not move with them.

2030, four ways it can end (our arithmetic on the 2025 joint schedule):

What the table says, in plain terms (our reading):

• Moving away did not erase the tax; it shrank it. In scenario B the couple pays California $122,546 instead of $177,773 because the $500,000 of appreciation that happened after the exchange, in Texas, is not Californian. But it is still more than the $114,132 they would have paid in 2025, because R&TC 17041(b) prices the California slice at a rate computed “on the entire taxable income” as if they were residents. The Texas gain pushes the rate up.
• A falling market caps the bill. The FTB's own example (a $3,500 deferred gain, later sold for a $3,000 gain) taxes only the $3,000. Scenario C works the same way.
• The cheapest exit is the one nobody plans for. Federal law gives heirs a basis equal to “the fair market value of the property at the date of the decedent's death” (26 U.S.C. 1014(a)(1)), California follows section 1014 through R&TC 18031, and the FTB lists inheritance as “eliminating the deferred California source gain or loss.”
• The withholding question comes first. At the 2025 closing, if the exchange had failed, the intermediary would have had to withhold 3 1/3% of $2,000,000 = $66,600 (our arithmetic, using the FTB's .0333 factor). The alternative calculation for an individual, 12.3% of the estimated gain, would have been $147,600, so the flat rate is lower here.

What ends the filing, and what does not

The FTB's February 2021 Tax News gives the list. Reporting continues until one of three things happens:

• The deferred California-source gain is recognized on a California return (a taxable sale, or the boot part of a later exchange).
• The property passes by inheritance.
• The replacement property is donated to a non-profit organization.

And one thing that does not end it: a further 1031 exchange. The FTB says the duty does not cease when the out-of-state replacement is exchanged again, “regardless of whether or not that property is located outside California.” When one of several replacement properties is sold, you remove it from the 3840, report the California gain allocated to it, and attach a statement; when one is exchanged, you file a second 3840 listing it as the property given up (FTB, “Reporting like-kind exchanges,” updated January 28, 2026).

DSTs, 721 roll-ups and other paper replacements

A DST interest is a replacement property for Form 3840 purposes. The 2025 instructions say: “If the property received is a Delaware statutory trust, enter the Delaware statutory trust name in the space provided for property address” and leave city, state and ZIP blank. A DST that owns buildings outside California is out-of-state property, so the annual filing applies (our reading). What DST sponsors charge, from their Form D filings, is in our DST fee analysis; how the structure works is in our Delaware statutory trust guide.

A 721 roll-up of a DST into a REIT operating partnership is a nonrecognition contribution under federal law, so the California gain stays deferred (our reading). The FTB guidance we found names only further 1031 exchanges, not section 721 contributions, so it does not say in so many words how Form 3840 is filed once you hold partnership units instead of real estate. Keep filing and attach a statement explaining the contribution until a preparer tells you otherwise; the gain becomes taxable when the units are redeemed or sold (our reading). Our 721 exchange guide covers the federal side.

Penalties if you stop filing. Section 18032(b) lets the FTB build an assessment from the deferred gain if you file neither the 3840 nor a return. Once a return is required and late, R&TC 19131 adds 5% of the tax per month, up to 25%, with a minimum for individuals more than 60 days late of the lesser of $135 or 100% of the tax, and 15% and 75% if the failure is fraudulent.

Form 593 withholding applies to Californians too

A premise worth correcting: California's real estate withholding is not only for nonresident sellers. R&TC 18662(e) applies to a disposition of California real property by any person other than most corporations and partnerships with a permanent place of business in the state, and the buyer, “including for this purpose any intermediary or accommodator in a deferred exchange,” must withhold 3 1/3% of the sales price. The rule does not apply if the price is $100,000 or less.

How a 1031 exchange fits, according to the 2026 Form 593 instructions:

The withholding is a credit, not the tax: the seller claims it on the California return for the year. For a failed exchange or boot withheld in the year after the sale, the instructions treat the credit as belonging to that later year unless you ask the FTB to move it.

Two California rules readers ask about

Real property only, but only since 2025 for everyone. Federal law has limited section 1031 to real property since 2018 (Pub. L. 115-97; the change applies to “exchanges completed after December 31, 2017”). California adopted that change in R&TC 18031.5, but for exchanges completed after January 10, 2019 it applied only to couples, heads of household and surviving spouses with AGI of $500,000 or more and single filers with $250,000 or more. Everyone below those lines could still exchange equipment, vehicles or other personal property for California purposes. SB 711 (Stats. 2025, ch. 231) made that carve-out end for taxable years beginning on or after January 1, 2025. The 2025 Form 3840 instructions now say flatly that for those years “like-kind exchanges are limited to real property.” Exchanges of only personal property never needed a 3840 (FTB Publication 1100).

Intermediaries are regulated in the Financial Code, not the Business and Professions Code. California's exchange-facilitator law is Financial Code Division 20.5, sections 51000 to 51013, added by Stats. 2008, ch. 708 and effective January 1, 2009. It sets no license requirement (our reading of sections 51000 to 51013); it requires, among other things, a fidelity bond of not less than $1,000,000 or an equal deposit or a qualified escrow or trust (section 51003). Our qualified intermediary guide compares California's statute with seven other states'. The federal identification and closing deadlines are the same in California as anywhere; our year-end 1031 timeline works them out, and the federal rules themselves are in our 1031 exchange rules guide.

Other states with a similar rule

We include a state only where we could read the rule in that state's own regulation or tax department document. Montana has an administrative rule on nonresidents' Montana-property exchanges, but we could not retrieve its text from the state's site, so it is left out.

Oregon's instructions say the form is filed “annually thereafter until the disposition of the like-kind property.” Massachusetts takes a different route: no annual form, but the seller must acknowledge the deferred gain and consent “to personal jurisdiction in Massachusetts” for the taxes “that will be due when the gain is realized.”

What a California seller can do with this

• Decide where the gain will be recognized before you choose a replacement state. Moving out of California after an exchange taxes only the California slice, at a rate set by your whole gain (scenario B). Staying taxes everything (scenario A).
• Put the 3840 on the calendar like a property tax bill. Initial in the exchange year, Annual every year after, Final with a statement when the gain is recognized. Keep the original Schedule A; each Annual repeats it.
• Keep the California basis. Schedule A line 6 asks for the California adjusted basis, which can differ from the federal one.
• Sign the Form 593 exchange certification at closing, and know that boot over $1,500 or a failed exchange brings 3 1/3% withholding.
• If the replacement is a DST, report the trust's name as the property, and keep filing through any 721 roll-up until the gain is recognized (our reading).
• Tell your estate planner the deferred California gain exists. The FTB treats inheritance as the end of it; a sale by you a year earlier would not be.

FAQ

Sources, read and saved on October 10, 2026: California Revenue and Taxation Code sections 17041, 17043, 17951, 18031, 18031.5, 18032, 18662, 19087, 19131 and 24953 as published on leginfo.legislature.ca.gov, and Financial Code Division 20.5 (sections 51000-51013, saved October 7, 2026); Franchise Tax Board Form FTB 3840 (2025) and its 2025 instructions, 2025 California Tax Rate Schedules, 2025 Form 540NR booklet, 2026 Form 593 and its instructions, Publication 1100 (revised October 2024), the pages “Reporting like-kind exchanges” and “Capital gains and losses” (updated January 28, 2026) and Tax News, February 2021; Oregon Department of Revenue Form OR-24 instructions (Rev. 08-18-23); Massachusetts Department of Revenue regulation 830 CMR 62B.2.4; and 26 U.S.C. 1031 and 1014, 2024 edition, from govinfo.gov. The worked example is our arithmetic on the 2025 joint rate schedule with stated assumptions; 2030 brackets will differ. This is analysis of public documents, not investment, legal or tax advice.