1031 Exchange in California: FTB 3840, Form 593 Withholding and 13.3% Tax

Form FTB 3840 keeps California's claim on your deferred gain, every year until it is recognized

Revenue and Taxation Code §18032 requires any taxpayer who exchanges California property under §1031 for property located outside California to file an information return, Form FTB 3840, for the year of the exchange and every subsequent year until the California-source gain or loss is recognized. The requirement dates from taxable years beginning January 1, 2014 onward, and it covers individuals, trusts, partnerships, LLCs and corporations regardless of residence.

The form allocates the deferred California gain among the replacement properties. The FTB's guidance is explicit that the obligation does not end when a replacement property is exchanged again: the taxpayer removes the property from the original 3840, files a second 3840 for the new exchange, and keeps filing until the California gain is finally recognized, wherever the property then sits.

The consequence of stopping is written into the statute: if the taxpayer fails to file the 3840 and files no California return, the FTB may estimate net income from the deferred gain and issue a Notice of Proposed Assessment for tax, penalties and interest. For 2025 exchanges, an individual's 3840 is due April 15, 2026 (October 15 with extension), attached to the return or filed on its own if there is no California filing requirement.

Exchanging California property for California property triggers no 3840. The form exists because the source of a gain is fixed when it is realized, so a Californian who moves to Nevada and later sells the Nevada replacement property still owes California tax on the California-source portion.

Form 593: how an exchange seller avoids the 3 1/3 percent withholding, and when the intermediary must withhold

California withholds 3 1/3 percent of the sales price on real estate sales (R&TC §18662), reported on Form 593, unless the seller certifies an exemption in Part III or the sale is $100,000 or less. A seller can instead elect the alternative withholding calculation, applying their tax rate to the estimated gain computed in Part VI.

For exchanges, the 2026 Form 593 instructions distinguish two cases. A simultaneous exchange is exempt outright; a deferred exchange is exempt at the time of the initial transfer, but if the seller receives money or other property beyond the like-kind property exceeding $1,500, the qualified intermediary must withhold on it. If the exchange does not take place or fails to qualify, the intermediary must withhold 3 1/3 percent of the sales price.

Because the qualified intermediary becomes the withholding agent, the exchange agreement should say who completes Form 593 and Form 593-V and when. The form goes to the escrow holder or intermediary before closing and to the FTB by the 20th day of the month after escrow closes.

13.3 percent at the top and no capital-gains discount: what a taxable sale would cost

California taxes capital gains as ordinary income. The 2025 tax rate schedules run to 12.3 percent on taxable income over $742,953 for a single filer ($1,485,906 joint), and R&TC §17043 adds a 1 percent tax on taxable income over $1 million, so the marginal rate on a large gain is 13.3 percent.

A $2 million gain on a Los Angeles apartment building sold taxably by a high-income owner could therefore carry a California bill in the hundreds of thousands of dollars before federal tax. That is the amount a completed exchange defers; the trade-off is the ongoing FTB 3840 obligation if the replacement property is outside the state.

Two related non-conformities matter to investors weighing alternatives. California does not conform to the deferral or exclusion of gains invested in qualified opportunity funds under IRC §§1400Z-1 and 1400Z-2 (the FTB's Schedule D (540) instructions require the full gain to be reported), and it does not follow IRC §168(k) additional depreciation, which the Form 3885A instructions list among federal provisions California has not adopted. An opportunity zone fund or a bonus depreciation fund defers or accelerates federal tax only; the investment types page describes how each works federally.

California conforms to §1031 as of January 1, 2025, for real property only

For tax years starting January 1, 2025 or later, California conforms to the Internal Revenue Code as of January 1, 2025, and like-kind exchanges are limited to real property. For exchanges started after January 10, 2019 and completed before January 1, 2025, California still allowed personal-property exchanges for individuals with adjusted gross income under $250,000 ($500,000 for joint filers, heads of household and surviving spouses), a transitional rule that can still appear on older FTB 3840 filings.

An LLC that holds California property owes the $800 annual LLC tax to the FTB whether or not it sells, and an LLC that is not disregarded is itself the 3840 filer; for a disregarded LLC, the owner files.

County $1.10 per $1,000, Los Angeles's Measure ULA and San Francisco's 6 percent tier

R&TC §11911 lets counties charge a documentary transfer tax of $0.55 per $500 of consideration (exclusive of liens remaining) when the value exceeds $100, and cities within such a county may add half that amount under §11911(b); Los Angeles and San Francisco levy their own, far higher rates. An exchange does not change the county tax; the tax is charged on the relinquished deed and again on any California replacement deed.

Charter cities set their own rates. The City of Los Angeles charges a base 0.45 percent ($2.25 per $500) and, under Measure ULA, an additional 4 percent on conveyances over $5.4 million and 5.5 percent at $10.9 million or more for closings after June 30, 2026 (thresholds adjust annually with the chained CPI), paid on top of the county's $1.10 per $1,000. San Francisco's schedule climbs from $2.50 per $500 under $250,000 to $27.50 per $500 (5.5 percent) from $10 million and $30 per $500 (6 percent) from $25 million.

Because these are percentage-of-price taxes paid at closing, they come out of exchange proceeds and reduce what reaches the replacement property; a Los Angeles seller at $12 million pays 5.95 percent in city tax alone. Exchanging into a DST holding property outside California avoids a California transfer tax on the replacement side.

Proposition 13: California replacement property is reassessed; a DST outside California is not

Article XIII A of the California Constitution caps the property tax at 1 percent of full cash value, allows the assessed base to rise at most 2 percent a year, and resets full cash value to the appraised value when property is 'purchased, newly constructed, or a change in ownership has occurred'. A 1031 exchange is a change in ownership: the Board of Equalization's guidance treats any transfer of the present interest and beneficial use of property as one, with consideration irrelevant.

The seller's low Proposition 13 base therefore ends with the relinquished sale, and any California replacement property is reassessed at its purchase price. An investor who has owned since the 1980s should compare the new property tax on a California replacement with the tax bill they are leaving; a replacement outside California, including a DST holding property in other states, sits outside Proposition 13 entirely.