What is the California 1031 clawback?
California's "clawback" rule lets California tax gain you deferred on California property, even after you exchanged into property in another state. California doesn't collect the tax at the time of the exchange. Instead it tracks the deferred gain and collects it when you eventually sell the out-of-state replacement in a taxable sale.
The tracking tool is FTB Form 3840, California Like-Kind Exchanges. It applies to exchanges of California property for property outside California that occurred in taxable years beginning on or after January 1, 2014.
| Situation | What California generally expects |
|---|---|
| Year you exchange California property for Nevada property | File FTB 3840 with your California return (or on its own if you have no other filing requirement) |
| Each year you keep holding the Nevada property | File FTB 3840 annually, even with no other California income |
| You sell the Nevada property in a taxable sale | Report and pay California tax on the gain deferred from the California property |
| You 1031 the Nevada property into another property | Deferral continues; keep filing FTB 3840 on the new replacement |
| You stop filing FTB 3840 | The FTB can send notices and may estimate and assess tax on the deferred gain |
Form and instructions: California Franchise Tax Board forms search (search "3840").
Planning around the clawback
Only the California gain is tracked
The clawback applies to the gain that was deferred from the California property. Appreciation on the Nevada replacement after the exchange is generally treated separately. For a Nevada resident, that later appreciation isn't California-source income. Your CPA should keep a clear record of the gain at the time of the exchange.
Keeping the deferral going
Nothing forces you to cash out. Many investors exchange again and again, staying in real estate and carrying the deferred gain forward, while filing FTB 3840 each year.
What happens at death
Under current federal law, heirs generally receive a stepped-up basis in inherited property, which can eliminate the deferred federal gain. Whether and how that affects California's tracked gain is a question for your estate attorney and CPA. Don't assume either way.
Common mistakes
- Forgetting to file FTB 3840 after moving out of California.
- Assuming a residency change erased the California gain.
- Losing the records that show how much gain was deferred at the time of the exchange.
- Not claiming the Form 593 withholding exemption at the California closing.
California 1031 Clawback FAQ
Tell us where you are in the sale. A licensed Nevada broker responds within one business day, usually the same day. We coordinate with your QI, CPA, and attorney; we don't replace them.