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?
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?
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?
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