Filing California’s
New §1031 Form
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authors and publisher are not engaged in rendering legal, accounting
or other professional advice and assume no liability in connection
with its use. Tax laws are constantly changing and are subject to
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the material in Spidell’s Filing California’s New §1031 Form
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FILING CALIFORNIA'S NEW §1031 FORM
Course objectives: The purpose of this course is to provide a discussion of new filing requirements
for exchanges of California property. Topics include: details of Form FTB 3840, filing requirements
for multiple owners or when there is a change in ownership, apportionment, residency of seller and
when to file the form, as well as the basics of like-kind exchanges, including the general rules,
avoiding constructive receipt, replacement property values in IRC §1031 exchanges, and much more.
After completing this course, you will be able to identify:
•
•
•
•
•
Details for filing Form FTB 3840
What information to include on Form FTB 3840
General requirements for a taxpayer to defer gain from the sale of property under IRC §1031
What will happen if the taxpayer receives any proceeds from the transaction
The identification and replacement time periods required for replacement properties
Category: Taxes
Recommended CPE Hours: CPAs/PAs — 1
CRTPs — 1 California Tax
Level: Basic
Prerequisite: None
Advanced Preparation: None
Expiration Date: March 2016*
*Exam must be completed within one year from the date of purchase
Filing California’s New §1031 Form
Table of Contents
New filing requirement for exchanges of California property ................................................................ 1
The law ......................................................................................................................................................... 1
Straddling 2013 and 2014 .................................................................................................................... 1
Details for filing ........................................................................................................................................... 2
Due date of the form ............................................................................................................................ 2
E-filing.................................................................................................................................................... 2
What goes on the form?.............................................................................................................................. 2
Other boxes ........................................................................................................................................... 3
Penalty for failure to file ...................................................................................................................... 3
Location of the properties ................................................................................................................... 3
Multiple owners or change in ownership .............................................................................................. 17
Owned by an entity............................................................................................................................ 17
Single-member LLC ........................................................................................................................... 17
Divorcing taxpayers ........................................................................................................................... 17
Married taxpayers filing separately ................................................................................................. 18
Death of owner ................................................................................................................................... 18
Property exchanged again ....................................................................................................................... 18
Apportionment .......................................................................................................................................... 19
Residency of seller..................................................................................................................................... 19
Seller is a resident ............................................................................................................................... 19
Seller is a nonresident ........................................................................................................................ 19
Preparer’s responsibility to notify .......................................................................................................... 20
Like-kind exchanges: IRC §1031 .................................................................................................................. 20
Basic exchange rules ................................................................................................................................. 20
Deferred exchanges................................................................................................................................... 21
45- and 180-day rules ......................................................................................................................... 21
Penalty for noncompliance ............................................................................................................... 22
Avoiding constructive receipt ................................................................................................................. 22
Who can be a QI? ................................................................................................................................ 23
Lack of QI nullifies IRC §1031 exchange ......................................................................................... 23
Replacement property values in IRC §1031 exchanges ....................................................................... 24
Replacement values ........................................................................................................................... 24
How to identify the replacement property (45-day rule) ............................................................. 25
Replacement value too high ............................................................................................................. 25
No deferred gain for disguised related-party transactions .......................................................... 25
Upgrade to new property.................................................................................................................. 26
FTB continues to audit IRC §1031 exchanges........................................................................................ 26
Taxpayer held cash............................................................................................................................. 26
Failed exchange is not reasonable cause for late filing ................................................................. 26
Taxpayer didn’t own the property! ................................................................................................. 27
©2015
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Spidell Publishing, Inc.®
Filing California’s New §1031 Form
NEW FILING REQUIREMENT FOR EXCHANGES OF CALIFORNIA PROPERTY
THE LAW
For taxable years beginning on or after January 1, 2014, taxpayers who complete a like-kind
exchange of California property for property located out of state will be required to file an
information return with the FTB on new Form FTB 3840, California Like-Kind Exchanges. (New
R&TC §§18032, 24953; AB 92 (Ch. 13-26))
The requirement applies to all taxpayers, including individuals, partnerships, LLCs, corporations,
estates, trusts, and exempt organizations. The requirement applies to residents and nonresidents.
However, for the 2014 taxable year, the form is only required for exchanges involving real property.
 Practice Pointer
There is no requirement to file this form for an exchange that occurred in a taxable year prior to
2014.
Straddling 2013 and 2014
The new rules apply to exchanges that occur in taxable years beginning on or after January 1,
2014, so your clients will not be required to file the new information return for exchanges where the
original property was relinquished in 2013.
However, the FTB has informed us that for reverse exchanges that began in 2013, where the
original property was not transferred until 2014, the information return will be required.
Example of reverse exchange
Fred exchanged an apartment building in California for another apartment building in
Texas through a reverse IRC §1031 exchange. In December 2013, Fred identified the Texas
apartment building he wanted and purchased it. At that time, he had not yet sold his
California apartment building. Fred sold his California building in January of 2014 and
successfully completed his IRC §1031 exchange. Because Fred did not relinquish his
California property until 2014, he is subject to the information reporting requirement.
When Form FTB 3840, California Like-Kind Exchanges, Must Be Filed
(No Form FTB 3840 is filed for property disposed of prior to January 1, 2014)
Seller residence
Old property location
New property location
Form required?
California
California
California
No
California
Outside California
California
No
California
California
Outside California
Yes
Outside California
California
California
No
Outside California
California
Outside California
Yes
Outside California
Outside California
California
No
Outside California
Outside California
Outside California
No
©2015
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Spidell Publishing, Inc.®
Filing California’s New §1031 Form
DETAILS FOR FILING
The information return must be filed for the year in which the exchange is completed and each
subsequent year until the gain is fully recognized, regardless of whether the seller/exchanger has
any other California franchise tax, income tax, or information return filing requirement.
The taxpayer files Form FTB 3840 with the income or franchise tax return for the year of the
exchange and for each subsequent year. If the taxpayer does not have a filing requirement, the form
may be filed as a stand-alone form, with the taxpayer’s signature, and mailed to the address
provided on the form. If the form is attached to the return and mailed, no signature is required.
For taxpayers with no California filing requirement, mail Form FTB 3840 to:
 Address
Franchise Tax Board
P.O. Box 1998
Rancho Cordova, CA 95471-1998
If the taxpayer has more than one like-kind exchange for California property or for out-of-state
property, file a Form FTB 3840 for each exchange.
 Practice Pointer
Form FTB 3840 contains a signature box. A taxpayer filing the form with the income or franchise
tax return does not sign Form 3840, as the return itself is being signed. Only sign Form 3840 if it is
being filed as a stand-alone return.
Due date of the form
The return is due on the extended due date of the return. Thus, for all calendar-year taxpayers
except exempt organizations, the 2014 form is due on or before October 15, 2015. The extended due
date for a 2014 calendar-year exempt organization is December 15, 2015.
E-filing
You may e-file the return that includes the form. If filing Form 3840 alone, you must paper file
the form.
WHAT GOES ON THE FORM?
Form 3840 asks for much of the same information as reported on the federal Form 8824,
including computation of the realized and recognized gain and basis computation of the new
property. California’s form also includes additional information, including percentages of
ownership and apportionment information. California also asks for the address or parcel number of
the property rather than “description” requested on the federal form.
Comment
The FTB attempts to audit each IRC §1031 transaction. The form provides an excellent start for
the FTB auditor.
©2015
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Spidell Publishing, Inc.®
Filing California’s New §1031 Form
Other boxes
The return contains check boxes for Initial, Amended, and Final Form 3840. There is also a box
for prior-year exchange. This box should not be checked in 2014, as the requirement does not apply
to a prior-year exchange. The exception would be a fiscal-year taxpayer with, for example, a January
year-end.
Penalty for failure to file
If the taxpayer fails to report the exchange in the year of the transaction or any subsequent year,
the FTB may, in the year the form was not filed, estimate net income — using any available
information — and issue a Notice of Proposed Assessment on the previously deferred gain plus
applicable penalties and interest in the year:
The taxpayer fails to file an information return; or
A required tax return is not filed.
•
•
Location of the properties
Property relinquished
If multiple properties were given up, and those properties were located both in and outside of
California, first calculate the deferred gain amount for each property without regard to location.
Then add the deferred gain or loss amounts for only the properties that were located in California,
and enter that amount on Side 2 Part I Line 8. Attach a statement that shows how the deferred gain
was calculated for each property given up.
Example of exchanging property inside and outside California
Flossie exchanged her two pieces of raw land — one in California and one in Nevada — for
a piece of raw land in New Jersey.
The facts are:
•
•
•
•
•
•
CA property has FMV of $300,000 and basis of $200,000;
NV property has FMV of $200,000 and basis of $100,000;
NJ property has FMV of $550,000;
She has exchange expense of $25,000;
The exchange expense is allocated 50/50 to each property, so her deferred gain on
both is $87,500; and
She takes out a loan of $75,000 to cover the exchange expense and the gap of
$50,000 in FMV.
She will list each of them on Side 2, Part I, but on line 8 she will only list the California
property. She must continue to file Form FTB 3840 until she has recognized the $100,000
gain on the California property.
©2015
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Spidell Publishing, Inc.®
Form
8824
Department of the Treasury
Internal Revenue Service
Like-Kind Exchanges
OMB No. 1545-1190
2014
(and section 1043 conflict-of-interest sales)
a Attach
to your tax return.
a Information about Form 8824 and its separate instructions is at www.irs.gov/form8824.
Name(s) shown on tax return
Attachment
Sequence No.
109
Identifying number
FLOSSIE MCFLOOZY
Part I
Information on the Like-Kind Exchange
565-65-6565
Note: If the property described on line 1 or line 2 is real or personal property located outside the United States, indicate the country.
1
Description of like-kind property given up:
RAW LAND, 111 MAIN ST., ANYTOWN, CALIFORNIA
RAW LAND, 321 CENTRAL AVE., DUSTYTOWN, NEVADA
2
Description of like-kind property received:
RAW LAND, 18 BOARDWALK, ATLANTIC CITY, NEW JERSEY
.
.
.
.
.
3
01/01/2001
.
.
.
.
.
4
07/01/2014
Date like-kind property you received was identified by written notice to another party (month,
day, year). See instructions for 45-day written identification requirement . . . . . . .
5
07/15/2014
6
Date you actually received the like-kind property from other party (month, day, year). See instructions
6
09/30/2014
7
Was the exchange of the property given up or received made with a related party, either directly or indirectly
(such as through an intermediary)? See instructions. If “Yes,” complete Part II. If “No,” go to Part III . . .
3
Date like-kind property given up was originally acquired (month, day, year)
4
Date you actually transferred your property to other party (month, day, year)
5
Part II
8
.
Yes
No
Related Party Exchange Information
Name of related party
Relationship to you
Related party’s identifying number
Address (no., street, and apt., room, or suite no., city or town, state, and ZIP code)
9
10
During this tax year (and before the date that is 2 years after the last transfer of property that was part of
the exchange), did the related party sell or dispose of any part of the like-kind property received from you
(or an intermediary) in the exchange or transfer property into the exchange, directly or indirectly (such as
through an intermediary), that became your replacement property? . . . . . . . . . . . . . .
Yes
During this tax year (and before the date that is 2 years after the last transfer of property that was part of
the exchange), did you sell or dispose of any part of the like-kind property you received? . . . . . .
Yes
No
No
If both lines 9 and 10 are “No” and this is the year of the exchange, go to Part III. If both lines 9 and 10 are “No” and this is not
the year of the exchange, stop here. If either line 9 or line 10 is “Yes,” complete Part III and report on this year’s tax return the
deferred gain or (loss) from line 24 unless one of the exceptions on line 11 applies.
11
If one of the exceptions below applies to the disposition, check the applicable box:
a
The disposition was after the death of either of the related parties.
b
The disposition was an involuntary conversion, and the threat of conversion occurred after the exchange.
c
You can establish to the satisfaction of the IRS that neither the exchange nor the disposition had tax avoidance as one of
its principal purposes. If this box is checked, attach an explanation (see instructions).
For Paperwork Reduction Act Notice, see the instructions.
BAA
REV 10/27/14 PRO
Form 8824 (2014)
Page 2
Form 8824 (2014)
Name(s) shown on tax return. Do not enter name and social security number if shown on other side.
Your social security number
FLOSSIE MCFLOOZY
565-65-6565
Part III
Realized Gain or (Loss), Recognized Gain, and Basis of Like-Kind Property Received
Caution: If you transferred and received (a) more than one group of like-kind properties or (b) cash or other (not like-kind) property,
see Reporting of multi-asset exchanges in the instructions.
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Note: Complete lines 12 through 14 only if you gave up property that was not like-kind. Otherwise, go to line 15.
Fair market value (FMV) of other property given up . . . . .
12
Adjusted basis of other property given up . . . . . . . .
13
Gain or (loss) recognized on other property given up. Subtract line 13 from line 12. Report the
gain or (loss) in the same manner as if the exchange had been a sale . . . . . . . . .
14
Caution: If the property given up was used previously or partly as a home, see Property used as
home in the instructions.
Cash received, FMV of other property received, plus net liabilities assumed by other party,
. .
reduced (but not below zero) by any exchange expenses you incurred (see instructions)
15
FMV of like-kind property you received . . . . . . . . . . . . . . . . . . .
16
Add lines 15 and 16 . . . . . . . . . . . . . . . . . . . . . . . . .
17
Adjusted basis of like-kind property you gave up, net amounts paid to other party, plus any
exchange expenses not used on line 15 (see instructions) . . . . . . . . . . . . .
18
Realized gain or (loss). Subtract line 18 from line 17 . . . . . . . . . . . . . .
19
Enter the smaller of line 15 or line 19, but not less than zero . . . . . . . . . . . .
20
Ordinary income under recapture rules. Enter here and on Form 4797, line 16 (see instructions)
21
Subtract line 21 from line 20. If zero or less, enter -0-. If more than zero, enter here and on
Schedule D or Form 4797, unless the installment method applies (see instructions) . . . .
22
Recognized gain. Add lines 21 and 22 . . . . . . . . . . . . . . . . . . .
23
24
.
Deferred gain or (loss). Subtract line 23 from line 19. If a related party exchange, see instructions
Basis of like-kind property received. Subtract line 15 from the sum of lines 18 and 23
. .
25
Part IV
0.
550,000.
550,000.
375,000.
175,000.
0.
0.
0.
175,000.
375,000.
Deferral of Gain From Section 1043 Conflict-of-Interest Sales
Note: This part is to be used only by officers or employees of the executive branch of the Federal Government or judicial
officers of the Federal Government (including certain spouses, minor or dependent children, and trustees as described in
section 1043) for reporting nonrecognition of gain under section 1043 on the sale of property to comply with the
conflict-of-interest requirements. This part can be used only if the cost of the replacement property is more than the basis of
the divested property.
26
Enter the number from the upper right corner of your certificate of divestiture. (Do not attach a
copy of your certificate. Keep the certificate with your records.) . . . . . . . . . . a
27
Description of divested property a
28
Description of replacement property a
29
Date divested property was sold (month, day, year) .
.
.
.
.
30
Sales price of divested property (see instructions).
.
.
.
.
.
30
31
Basis of divested property
.
.
.
.
.
31
32
33
Realized gain. Subtract line 31 from line 30 . . . . . . . .
Cost of replacement property purchased within 60 days after date
of sale . . . . . . . . . . . . . . . . . . . .
.
34
Subtract line 33 from line 30. If zero or less, enter -0-
.
35
36
Ordinary income under recapture rules. Enter here and on Form 4797, line 10 (see instructions)
Subtract line 35 from line 34. If zero or less, enter -0-. If more than zero, enter here and on
Schedule D or Form 4797 (see instructions) . . . . . . . . . . . . . . . . .
35
37
Deferred gain. Subtract the sum of lines 35 and 36 from line 32
.
.
.
.
.
.
.
.
.
.
37
38
Basis of replacement property. Subtract line 37 from line 33 .
.
.
.
.
.
.
.
.
.
.
38
.
.
.
.
.
.
.
.
.
.
.
.
REV 10/27/14 PRO
.
.
.
.
.
.
.
.
.
.
.
.
29
.
.
.
.
.
.
.
32
.
.
.
.
.
.
.
34
33
.
36
Form 8824 (2014)
CALIFORNIA FORM
TAXABLE YEAR
2014
3840
California Like-Kind Exchanges
For the calendar year 2014 or fiscal year beginning (mm/dd/yyyy)
, and ending (mm/dd/yyyy)
Name(s) as shown on your California tax return.
.
California corporation number
FLOSSIE MCFLOOZY
SSN or ITIN
5
6
Spouse’s/RDP's SSN or ITIN
5
6
5
6
5
6
FEIN
5
Additional information. See instructions.
California Secretary of State file number
Street address (suite/room no.)
PMB no.
1800 ANYWHERE
City (If you have a foreign address, see instructions.)
State
ARCATA
CA
Foreign country name
Foreign province/state/county
ZIP code
9
5
9
5
9
Foreign postal code

B 
C
 Individual  Estate  Trust  C corporation  S corporation  Partnership  Limited liability company  Exempt organization
 Initial FTB 3840  Amended FTB 3840  Final FTB 3840 Does this exchange involve:   Real property  Personal property  Related party. If the related party box is checked, enter:
Name of the related party:_________________________________________________ Related party's SSN/ITIN or FEIN:____________________ .
A
Part I Information on Like-Kind Exchange. See instructions.
1 Description of like-kind property given up:
2 Description of like-kind property received: RAW LAND
18 BOARDWALK, ATLANTIC CITY, NJ 12345
3 Date like-kind property given up was originally acquired (mm/dd/yyyy) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 01/01/2001
4 Date you actually transferred your property to other party (mm/dd/yyyy) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 07/01/2014
5 Date like-kind property you received was identified by written notice to another party (mm/dd/yyyy) . . . . . . . . . . . . . . . . . 5 07/15/2014
6 Date you actually received the like-kind property from other party (mm/dd/yyyy) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 09/30/2014
Part II Realized Gain or (Loss), Recognized Gain, and Basis of Like-Kind Property Received. See instructions.
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Fair market value (FMV) of other property given up.. . . . . . . . . . . . . . . . . . . . . . . . . 7
00
Adjusted basis of other property given up. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
00
Gain or (loss) recognized on other property given up. Subtract line 8 from line 7. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Cash received, FMV of other property received, plus net liabilities assumed by the other party, reduced
(but not below zero) by any exchange expenses incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
FMV of like-kind property received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Add line 10 and line 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Adjusted basis of like-kind property given up, net amounts paid to other party, plus any exchange expenses not used on line 10. 13
Realized gain or (loss). Subtract line 13 from line 12. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  14
Enter smaller of line 10 or line 14, but not less than zero . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Ordinary income under recapture rules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Subtract line 16 from line 15. If more than -0-, enter here. If zero or less, enter -0-. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Recognized gain. Add line 16 and line 17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  18
Deferred gain or (loss). Subtract line 18 from line 14. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Basis of like-kind property received. Subtract line 10 from the sum of line 13 and line 18. . . . . . . . . . . . . . . . . . . . . .  20
Sign here
if you are
filing this form
separately and
not with a tax
return. See
instructions.
It is unlawful
to forge a
spouse’s/RDP’s
signature.
00
0.
550,000.
550,000.
375,000.
175,000.
0.
0.
0.
175,000.
375,000.
Under penalties of perjury, I declare that I have examined this return and to the best of my knowledge and belief, it is true, correct and complete.
Your signature
Telephone
If joint, spouse’s/RDP’s signature
Telephone
Owner, officer, or representative signature
Title
Date (mm/dd/yyyy)
Date (mm/dd/yyyy)
Date (mm/dd/yyyy)
TIM HILGER CPA
Firm’s name
Firm’s address
TIM HILGER CPA
19972 CALLE SOLIS WALNUT CA 91789
REV 02/13/15 PRO
For Privacy Notice, get FTB 1131 ENG/SP.
175
8421143
FTB 3840 C1 (NEW 2014) Side 1
00
00
00
00
00
00
00
00
00
00
00
Taxpayer name
Taxpayer ID
FLOSSIE MCFLOOZY
565-65-6565
Schedule A Properties Given Up and Received. See instructions.
Part I Properties Given Up. If you gave up more than three properties, attach additional copies of Schedule A.
Is property
in
California?
1
A
B
C
 Yes
 No
 Yes
 No
 Yes
 No
Ownership
percentage
Property description
Property address (if no street address, provide assessor's parcel number and county)/Description
_ _100
_ _ _%
111 MAIN ST
/
RAW LAND
City
State ZIP code
ANYTOWN
CA
93202
Property address (if no street address, provide assessor's parcel number and county)/Description
_ _100
_ _ _%
321 CENTRAL AVE
/
RAW LAND
City
State ZIP code
DUSTYTOWN
NV
89101
Property address (if no street address, provide assessor's parcel number and county)/Description
_ _ _ _ _%
City
State ZIP code
A
B
C
 Yes  No
 Yes  No
 Yes  No
2
Properties given up:
Was this property acquired in a prior tax deferred
2
exchange? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
Consideration/Sales price . . . . . . . . . . . . . . . . . . . . . . . . . .
3
300,000.
200,000.
4
Selling expenses paid/incurred . . . . . . . . . . . . . . . . . . . . . .
4
12,500.
12,500.
5
Amount realized. Subtract line 4 from line 3 . . . . . . . . . . . .
5
287,500.
187,500.
6
California adjusted basis . . . . . . . . . . . . . . . . . . . . . . . . . . .
6
200,000.
100,000.
7
Realized gain or (loss). Subtract line 6 from line 5 . . . . . . 7
87,500.
87,500.
8
California source deferred gain. If all property given up was located in California, enter the amount from
Side 1, line 19, Deferred gain, adjusted for differences between federal and California law. If multiple properties
were given up and the properties were located both in and outside of California, see instructions . . . . . . . . . . . .  8
87,500. 00
Part II Properties Received. If you received more than three properties, attach additional copies of Schedule A.
Is property
in
California?
9
D
 Yes
 No
E
 Yes
 No
F
 Yes
 No
Ownership
percentage
Property description
Property address (if no street address, provide assessor's parcel number and county)/Description
_ _100
_ _ _%
18 BOARDWALK
/
RAW LAND
City
State ZIP code
ATLANTIC CITY
NJ 12345
Property address (if no street address, provide assessor's parcel number and county)/Description
_ _ _ _ _%
City
State ZIP code
Property address (if no street address, provide assessor's parcel number and county)/Description
_ _ _ _ _%
City
State ZIP code
Part III Allocation of California Source Deferred Gain. See instructions.
10
11
Properties received:
Allocation of California source deferred gain to
properties received. If only one property was received,
enter the amount from Part I, line 8, in column D. If more
than one property was received, see instructions. . . . . . . . . 10
D
E
F
87,500.
Apportionment percentage for the taxable year of the exchange. See instructions . . . . . . . . . . . . . . . . . . . . . . . . Side 2 FTB 3840 C1 (NEW 2014)
175
8422143
 11 __ __ __ __ __ __ __%
REV 02/13/15 PRO
Form
8824
Department of the Treasury
Internal Revenue Service
Like-Kind Exchanges
OMB No. 1545-1190
2014
(and section 1043 conflict-of-interest sales)
a Attach
to your tax return.
a Information about Form 8824 and its separate instructions is at www.irs.gov/form8824.
Name(s) shown on tax return
Attachment
Sequence No.
109
Identifying number
FLOSSIE MCFLOOZY
Part I
Information on the Like-Kind Exchange
565-65-6565
Note: If the property described on line 1 or line 2 is real or personal property located outside the United States, indicate the country.
1
Description of like-kind property given up:
RAW LAND, 111 MAIN ST., ANYTOWN, CALIFORNIA
RAW LAND, 321 CENTRAL AVE., DUSTYTOWN, NEVADA
2
Description of like-kind property received:
RAW LAND, 18 BOARDWALK, ATLANTIC CITY, NEW JERSEY
.
.
.
.
.
3
01/01/2001
.
.
.
.
.
4
07/01/2014
Date like-kind property you received was identified by written notice to another party (month,
day, year). See instructions for 45-day written identification requirement . . . . . . .
5
07/15/2014
6
Date you actually received the like-kind property from other party (month, day, year). See instructions
6
09/30/2014
7
Was the exchange of the property given up or received made with a related party, either directly or indirectly
(such as through an intermediary)? See instructions. If “Yes,” complete Part II. If “No,” go to Part III . . .
3
Date like-kind property given up was originally acquired (month, day, year)
4
Date you actually transferred your property to other party (month, day, year)
5
Part II
8
.
Yes
No
Related Party Exchange Information
Name of related party
Relationship to you
Related party’s identifying number
Address (no., street, and apt., room, or suite no., city or town, state, and ZIP code)
9
10
During this tax year (and before the date that is 2 years after the last transfer of property that was part of
the exchange), did the related party sell or dispose of any part of the like-kind property received from you
(or an intermediary) in the exchange or transfer property into the exchange, directly or indirectly (such as
through an intermediary), that became your replacement property? . . . . . . . . . . . . . .
Yes
During this tax year (and before the date that is 2 years after the last transfer of property that was part of
the exchange), did you sell or dispose of any part of the like-kind property you received? . . . . . .
Yes
No
No
If both lines 9 and 10 are “No” and this is the year of the exchange, go to Part III. If both lines 9 and 10 are “No” and this is not
the year of the exchange, stop here. If either line 9 or line 10 is “Yes,” complete Part III and report on this year’s tax return the
deferred gain or (loss) from line 24 unless one of the exceptions on line 11 applies.
11
If one of the exceptions below applies to the disposition, check the applicable box:
a
The disposition was after the death of either of the related parties.
b
The disposition was an involuntary conversion, and the threat of conversion occurred after the exchange.
c
You can establish to the satisfaction of the IRS that neither the exchange nor the disposition had tax avoidance as one of
its principal purposes. If this box is checked, attach an explanation (see instructions).
For Paperwork Reduction Act Notice, see the instructions.
BAA
REV 10/27/14 PRO
Form 8824 (2014)
Page 2
Form 8824 (2014)
Name(s) shown on tax return. Do not enter name and social security number if shown on other side.
Your social security number
FLOSSIE MCFLOOZY
565-65-6565
Part III
Realized Gain or (Loss), Recognized Gain, and Basis of Like-Kind Property Received
Caution: If you transferred and received (a) more than one group of like-kind properties or (b) cash or other (not like-kind) property,
see Reporting of multi-asset exchanges in the instructions.
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Note: Complete lines 12 through 14 only if you gave up property that was not like-kind. Otherwise, go to line 15.
Fair market value (FMV) of other property given up . . . . .
12
Adjusted basis of other property given up . . . . . . . .
13
Gain or (loss) recognized on other property given up. Subtract line 13 from line 12. Report the
gain or (loss) in the same manner as if the exchange had been a sale . . . . . . . . .
14
Caution: If the property given up was used previously or partly as a home, see Property used as
home in the instructions.
Cash received, FMV of other property received, plus net liabilities assumed by other party,
. .
reduced (but not below zero) by any exchange expenses you incurred (see instructions)
15
FMV of like-kind property you received . . . . . . . . . . . . . . . . . . .
16
Add lines 15 and 16 . . . . . . . . . . . . . . . . . . . . . . . . .
17
Adjusted basis of like-kind property you gave up, net amounts paid to other party, plus any
exchange expenses not used on line 15 (see instructions) . . . . . . . . . . . . .
18
Realized gain or (loss). Subtract line 18 from line 17 . . . . . . . . . . . . . .
19
Enter the smaller of line 15 or line 19, but not less than zero . . . . . . . . . . . .
20
Ordinary income under recapture rules. Enter here and on Form 4797, line 16 (see instructions)
21
Subtract line 21 from line 20. If zero or less, enter -0-. If more than zero, enter here and on
Schedule D or Form 4797, unless the installment method applies (see instructions) . . . .
22
Recognized gain. Add lines 21 and 22 . . . . . . . . . . . . . . . . . . .
23
24
.
Deferred gain or (loss). Subtract line 23 from line 19. If a related party exchange, see instructions
Basis of like-kind property received. Subtract line 15 from the sum of lines 18 and 23
. .
25
Part IV
0.
550,000.
550,000.
375,000.
175,000.
0.
0.
0.
175,000.
375,000.
Deferral of Gain From Section 1043 Conflict-of-Interest Sales
Note: This part is to be used only by officers or employees of the executive branch of the Federal Government or judicial
officers of the Federal Government (including certain spouses, minor or dependent children, and trustees as described in
section 1043) for reporting nonrecognition of gain under section 1043 on the sale of property to comply with the
conflict-of-interest requirements. This part can be used only if the cost of the replacement property is more than the basis of
the divested property.
26
Enter the number from the upper right corner of your certificate of divestiture. (Do not attach a
copy of your certificate. Keep the certificate with your records.) . . . . . . . . . . a
27
Description of divested property a
28
Description of replacement property a
29
Date divested property was sold (month, day, year) .
.
.
.
.
30
Sales price of divested property (see instructions).
.
.
.
.
.
30
31
Basis of divested property
.
.
.
.
.
31
32
33
Realized gain. Subtract line 31 from line 30 . . . . . . . .
Cost of replacement property purchased within 60 days after date
of sale . . . . . . . . . . . . . . . . . . . .
.
34
Subtract line 33 from line 30. If zero or less, enter -0-
.
35
36
Ordinary income under recapture rules. Enter here and on Form 4797, line 10 (see instructions)
Subtract line 35 from line 34. If zero or less, enter -0-. If more than zero, enter here and on
Schedule D or Form 4797 (see instructions) . . . . . . . . . . . . . . . . .
35
37
Deferred gain. Subtract the sum of lines 35 and 36 from line 32
.
.
.
.
.
.
.
.
.
.
37
38
Basis of replacement property. Subtract line 37 from line 33 .
.
.
.
.
.
.
.
.
.
.
38
.
.
.
.
.
.
.
.
.
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.
.
REV 10/27/14 PRO
.
.
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.
29
.
.
.
.
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.
.
32
.
.
.
.
.
.
.
34
33
.
36
Form 8824 (2014)
Filing California’s New §1031 Form
Properties received
List each property received in the exchange on Side 2, Part II, line 9. Indicate if the property is
located in California and the taxpayer’s percentage of ownership.
Enter the full address where each property received is located, or if the property received does
not have a street address, provide the assessor’s parcel number, the county, and the state in which
the property is located.
Allocate the deferred gain between the properties received using the federal numbers, adjusted
for California purposes if there was basis difference.
Example of exchanging property inside and outside California
Ida exchanged one piece of land in California for two pieces of land: one in California
and one in New Jersey.
The facts are:
Relinquished CA property:
FMV
Basis
Replacement property FMV:
CA
NJ
Exchange expenses
Deferred gain (FMV - basis - exchange expenses)
Deferred gain computed as follows:
CA (($75,000 × $600,000) ÷ $900,000)
NJ (($75,000 × $300,000) ÷ $900,000)
Cash in (whether debt or cash doesn’t matter):
($400,000 difference in FMV + $25,000 exchange expenses)
Total basis of replacement properties:
($400,000 relinquished basis + $425,000 cash) or
($900,000 replacement FMV – $75,000 deferred gain)
Basis of replacement properties:
CA ($600,000 FMV - $50,000 deferred gain)
NJ ($300,000 FMV - $25,000 deferred gain)
©2015
10
$500,000
$400,000
$600,000
$300,000
$25,000
$75,000
$50,000
$25,000
$425,000
$825,000
$550,000
$250,000
Spidell Publishing, Inc.®
Form
8824
Department of the Treasury
Internal Revenue Service
Like-Kind Exchanges
OMB No. 1545-1190
2014
(and section 1043 conflict-of-interest sales)
a Attach
to your tax return.
a Information about Form 8824 and its separate instructions is at www.irs.gov/form8824.
Name(s) shown on tax return
Attachment
Sequence No.
109
Identifying number
HOBART IDA
Part I
Information on the Like-Kind Exchange
565-78-7878
Note: If the property described on line 1 or line 2 is real or personal property located outside the United States, indicate the country.
1
Description of like-kind property given up:
RAW LAND, 456 654TH ST, NEWTOWN, CA 95021
2
Description of like-kind property received:
RAW LAND, 654 ALICE ST, OLDTOWN, CA 94444
RAW LAND, 19 HARVARD ST, NEWARK, NJ 12829
.
.
.
.
.
3
01/01/2001
.
.
.
.
.
4
07/01/2014
Date like-kind property you received was identified by written notice to another party (month,
day, year). See instructions for 45-day written identification requirement . . . . . . .
5
07/15/2014
6
Date you actually received the like-kind property from other party (month, day, year). See instructions
6
09/30/2014
7
Was the exchange of the property given up or received made with a related party, either directly or indirectly
(such as through an intermediary)? See instructions. If “Yes,” complete Part II. If “No,” go to Part III . . .
3
Date like-kind property given up was originally acquired (month, day, year)
4
Date you actually transferred your property to other party (month, day, year)
5
Part II
8
.
Yes
No
Related Party Exchange Information
Name of related party
Relationship to you
Related party’s identifying number
Address (no., street, and apt., room, or suite no., city or town, state, and ZIP code)
9
10
During this tax year (and before the date that is 2 years after the last transfer of property that was part of
the exchange), did the related party sell or dispose of any part of the like-kind property received from you
(or an intermediary) in the exchange or transfer property into the exchange, directly or indirectly (such as
through an intermediary), that became your replacement property? . . . . . . . . . . . . . .
Yes
During this tax year (and before the date that is 2 years after the last transfer of property that was part of
the exchange), did you sell or dispose of any part of the like-kind property you received? . . . . . .
Yes
No
No
If both lines 9 and 10 are “No” and this is the year of the exchange, go to Part III. If both lines 9 and 10 are “No” and this is not
the year of the exchange, stop here. If either line 9 or line 10 is “Yes,” complete Part III and report on this year’s tax return the
deferred gain or (loss) from line 24 unless one of the exceptions on line 11 applies.
11
If one of the exceptions below applies to the disposition, check the applicable box:
a
The disposition was after the death of either of the related parties.
b
The disposition was an involuntary conversion, and the threat of conversion occurred after the exchange.
c
You can establish to the satisfaction of the IRS that neither the exchange nor the disposition had tax avoidance as one of
its principal purposes. If this box is checked, attach an explanation (see instructions).
For Paperwork Reduction Act Notice, see the instructions.
BAA
REV 10/27/14 PRO
Form 8824 (2014)
Page 2
Form 8824 (2014)
Name(s) shown on tax return. Do not enter name and social security number if shown on other side.
Your social security number
HOBART IDA
565-78-7878
Part III
Realized Gain or (Loss), Recognized Gain, and Basis of Like-Kind Property Received
Caution: If you transferred and received (a) more than one group of like-kind properties or (b) cash or other (not like-kind) property,
see Reporting of multi-asset exchanges in the instructions.
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Note: Complete lines 12 through 14 only if you gave up property that was not like-kind. Otherwise, go to line 15.
Fair market value (FMV) of other property given up . . . . .
12
Adjusted basis of other property given up . . . . . . . .
13
Gain or (loss) recognized on other property given up. Subtract line 13 from line 12. Report the
gain or (loss) in the same manner as if the exchange had been a sale . . . . . . . . .
14
Caution: If the property given up was used previously or partly as a home, see Property used as
home in the instructions.
Cash received, FMV of other property received, plus net liabilities assumed by other party,
. .
reduced (but not below zero) by any exchange expenses you incurred (see instructions)
15
FMV of like-kind property you received . . . . . . . . . . . . . . . . . . .
16
Add lines 15 and 16 . . . . . . . . . . . . . . . . . . . . . . . . .
17
Adjusted basis of like-kind property you gave up, net amounts paid to other party, plus any
exchange expenses not used on line 15 (see instructions) . . . . . . . . . . . . .
18
Realized gain or (loss). Subtract line 18 from line 17 . . . . . . . . . . . . . .
19
Enter the smaller of line 15 or line 19, but not less than zero . . . . . . . . . . . .
20
Ordinary income under recapture rules. Enter here and on Form 4797, line 16 (see instructions)
21
Subtract line 21 from line 20. If zero or less, enter -0-. If more than zero, enter here and on
Schedule D or Form 4797, unless the installment method applies (see instructions) . . . .
22
Recognized gain. Add lines 21 and 22 . . . . . . . . . . . . . . . . . . .
23
24
.
Deferred gain or (loss). Subtract line 23 from line 19. If a related party exchange, see instructions
Basis of like-kind property received. Subtract line 15 from the sum of lines 18 and 23
. .
25
Part IV
0.
900,000.
900,000.
825,000.
75,000.
0.
0.
0.
75,000.
825,000.
Deferral of Gain From Section 1043 Conflict-of-Interest Sales
Note: This part is to be used only by officers or employees of the executive branch of the Federal Government or judicial
officers of the Federal Government (including certain spouses, minor or dependent children, and trustees as described in
section 1043) for reporting nonrecognition of gain under section 1043 on the sale of property to comply with the
conflict-of-interest requirements. This part can be used only if the cost of the replacement property is more than the basis of
the divested property.
26
Enter the number from the upper right corner of your certificate of divestiture. (Do not attach a
copy of your certificate. Keep the certificate with your records.) . . . . . . . . . . a
27
Description of divested property a
28
Description of replacement property a
29
Date divested property was sold (month, day, year) .
.
.
.
.
30
Sales price of divested property (see instructions).
.
.
.
.
.
30
31
Basis of divested property
.
.
.
.
.
31
32
33
Realized gain. Subtract line 31 from line 30 . . . . . . . .
Cost of replacement property purchased within 60 days after date
of sale . . . . . . . . . . . . . . . . . . . .
.
34
Subtract line 33 from line 30. If zero or less, enter -0-
.
35
36
Ordinary income under recapture rules. Enter here and on Form 4797, line 10 (see instructions)
Subtract line 35 from line 34. If zero or less, enter -0-. If more than zero, enter here and on
Schedule D or Form 4797 (see instructions) . . . . . . . . . . . . . . . . .
35
37
Deferred gain. Subtract the sum of lines 35 and 36 from line 32
.
.
.
.
.
.
.
.
.
.
37
38
Basis of replacement property. Subtract line 37 from line 33 .
.
.
.
.
.
.
.
.
.
.
38
.
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REV 10/27/14 PRO
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29
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32
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34
33
.
36
Form 8824 (2014)
CALIFORNIA FORM
TAXABLE YEAR
2014
3840
California Like-Kind Exchanges
For the calendar year 2014 or fiscal year beginning (mm/dd/yyyy)
, and ending (mm/dd/yyyy)
Name(s) as shown on your California tax return.
.
California corporation number
HOBART IDA
SSN or ITIN
5
6
Spouse’s/RDP's SSN or ITIN
5
7
8
7
8
7
FEIN
8
Additional information. See instructions.
California Secretary of State file number
Street address (suite/room no.)
PMB no.
123 HELLONWHEELS
City (If you have a foreign address, see instructions.)
State
ANYWHERE
CA
Foreign country name
Foreign province/state/county
ZIP code
9
3
0
3
6
Foreign postal code

B 
C
 Individual  Estate  Trust  C corporation  S corporation  Partnership  Limited liability company  Exempt organization
 Initial FTB 3840  Amended FTB 3840  Final FTB 3840 Does this exchange involve:   Real property  Personal property  Related party. If the related party box is checked, enter:
Name of the related party:_________________________________________________ Related party's SSN/ITIN or FEIN:____________________ .
A
Part I Information on Like-Kind Exchange. See instructions.
1 Description of like-kind property given up: RAW LAND, 456 654TH ST, NEWTOWN, CA 95021
2 Description of like-kind property received: RAW LAND, 654 456TH ST, NEWTOWN, CA 95021
RAW LAND, 19 HARVARD ST, NEWARK, NJ 12829,
3 Date like-kind property given up was originally acquired (mm/dd/yyyy) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 01/01/2001
4 Date you actually transferred your property to other party (mm/dd/yyyy) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 07/01/2014
5 Date like-kind property you received was identified by written notice to another party (mm/dd/yyyy) . . . . . . . . . . . . . . . . . 5 07/15/2014
6 Date you actually received the like-kind property from other party (mm/dd/yyyy) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 09/30/2014
Part II Realized Gain or (Loss), Recognized Gain, and Basis of Like-Kind Property Received. See instructions.
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Fair market value (FMV) of other property given up.. . . . . . . . . . . . . . . . . . . . . . . . . 7
00
Adjusted basis of other property given up. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
00
Gain or (loss) recognized on other property given up. Subtract line 8 from line 7. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Cash received, FMV of other property received, plus net liabilities assumed by the other party, reduced
(but not below zero) by any exchange expenses incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
FMV of like-kind property received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Add line 10 and line 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Adjusted basis of like-kind property given up, net amounts paid to other party, plus any exchange expenses not used on line 10. 13
Realized gain or (loss). Subtract line 13 from line 12. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  14
Enter smaller of line 10 or line 14, but not less than zero . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Ordinary income under recapture rules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Subtract line 16 from line 15. If more than -0-, enter here. If zero or less, enter -0-. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Recognized gain. Add line 16 and line 17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  18
Deferred gain or (loss). Subtract line 18 from line 14. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Basis of like-kind property received. Subtract line 10 from the sum of line 13 and line 18. . . . . . . . . . . . . . . . . . . . . .  20
Sign here
if you are
filing this form
separately and
not with a tax
return. See
instructions.
It is unlawful
to forge a
spouse’s/RDP’s
signature.
00
0.
900,000.
900,000.
825,000.
75,000.
0.
0.
0.
75,000.
825,000.
Under penalties of perjury, I declare that I have examined this return and to the best of my knowledge and belief, it is true, correct and complete.
Your signature
Telephone
If joint, spouse’s/RDP’s signature
Telephone
Owner, officer, or representative signature
Title
Date (mm/dd/yyyy)
Date (mm/dd/yyyy)
Date (mm/dd/yyyy)
TIM HILGER CPA
Firm’s name
Firm’s address
TIM HILGER CPA
19972 CALLE SOLIS WALNUT CA 91789
REV 02/13/15 PRO
For Privacy Notice, get FTB 1131 ENG/SP.
175
8421143
FTB 3840 C1 (NEW 2014) Side 1
00
00
00
00
00
00
00
00
00
00
00
Taxpayer name
Taxpayer ID
HOBART IDA
565-78-7878
Schedule A Properties Given Up and Received. See instructions.
Part I Properties Given Up. If you gave up more than three properties, attach additional copies of Schedule A.
Is property
in
California?
1
A
B
C
 Yes
 No
 Yes
 No
 Yes
 No
Ownership
percentage
Property description
Property address (if no street address, provide assessor's parcel number and county)/Description
_ _100
_ _ _%
456 654TH ST
/
RAW LAND
City
State ZIP code
NEWTOWN
CA
95021
Property address (if no street address, provide assessor's parcel number and county)/Description
_ _100
_ _ _%
19 HARVARD ST
/
RAW LAND
City
State ZIP code
NEWARK
NJ
12829
Property address (if no street address, provide assessor's parcel number and county)/Description
_ _ _ _ _%
City
State ZIP code
A
B
C
 Yes  No
 Yes  No
 Yes  No
2
Properties given up:
Was this property acquired in a prior tax deferred
2
exchange? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
Consideration/Sales price . . . . . . . . . . . . . . . . . . . . . . . . . .
3
4
Selling expenses paid/incurred . . . . . . . . . . . . . . . . . . . . . .
4
25,000.
5
Amount realized. Subtract line 4 from line 3 . . . . . . . . . . . .
5
475,000.
500,000.
6
California adjusted basis . . . . . . . . . . . . . . . . . . . . . . . . . . .
6
400,000.
7
Realized gain or (loss). Subtract line 6 from line 5 . . . . . . 7
75,000.
8
California source deferred gain. If all property given up was located in California, enter the amount from
Side 1, line 19, Deferred gain, adjusted for differences between federal and California law. If multiple properties
were given up and the properties were located both in and outside of California, see instructions . . . . . . . . . . . .  8
75,000. 00
Part II Properties Received. If you received more than three properties, attach additional copies of Schedule A.
Is property
in
California?
9
D
E
F
 Yes
 No
 Yes
 No
 Yes
 No
Ownership
percentage
Property description
Property address (if no street address, provide assessor's parcel number and county)/Description
_ _100
_ _ _%
654 ALICE ST
/
RAW LAND
City
State ZIP code
OLDTOWN
CA 94444
Property address (if no street address, provide assessor's parcel number and county)/Description
_ _100
_ _ _%
19 HARVARD ST
/
RAW LAND
City
State ZIP code
NEWARK
NJ 12829
Property address (if no street address, provide assessor's parcel number and county)/Description
_ _ _ _ _%
City
State ZIP code
Part III Allocation of California Source Deferred Gain. See instructions.
10
11
Properties received:
Allocation of California source deferred gain to
properties received. If only one property was received,
enter the amount from Part I, line 8, in column D. If more
than one property was received, see instructions. . . . . . . . . 10
D
50,000.
E
F
25,000.
Apportionment percentage for the taxable year of the exchange. See instructions . . . . . . . . . . . . . . . . . . . . . . . . Side 2 FTB 3840 C1 (NEW 2014)
175
8422143
 11 __ __ __ __ __ __ __%
REV 02/13/15 PRO
Form
8824
Department of the Treasury
Internal Revenue Service
Like-Kind Exchanges
OMB No. 1545-1190
2014
(and section 1043 conflict-of-interest sales)
a Attach
to your tax return.
a Information about Form 8824 and its separate instructions is at www.irs.gov/form8824.
Name(s) shown on tax return
Attachment
Sequence No.
109
Identifying number
HOBART IDA
Part I
Information on the Like-Kind Exchange
565-78-7878
Note: If the property described on line 1 or line 2 is real or personal property located outside the United States, indicate the country.
1
Description of like-kind property given up:
RAW LAND, 456 654TH ST, NEWTOWN, CA 95021
2
Description of like-kind property received:
RAW LAND, 654 ALICE ST, OLDTOWN, CA 94444
RAW LAND, 19 HARVARD ST, NEWARK, NJ 12829
.
.
.
.
.
3
01/01/2001
.
.
.
.
.
4
07/01/2014
Date like-kind property you received was identified by written notice to another party (month,
day, year). See instructions for 45-day written identification requirement . . . . . . .
5
07/15/2014
6
Date you actually received the like-kind property from other party (month, day, year). See instructions
6
09/30/2014
7
Was the exchange of the property given up or received made with a related party, either directly or indirectly
(such as through an intermediary)? See instructions. If “Yes,” complete Part II. If “No,” go to Part III . . .
3
Date like-kind property given up was originally acquired (month, day, year)
4
Date you actually transferred your property to other party (month, day, year)
5
Part II
8
.
Yes
No
Related Party Exchange Information
Name of related party
Relationship to you
Related party’s identifying number
Address (no., street, and apt., room, or suite no., city or town, state, and ZIP code)
9
10
During this tax year (and before the date that is 2 years after the last transfer of property that was part of
the exchange), did the related party sell or dispose of any part of the like-kind property received from you
(or an intermediary) in the exchange or transfer property into the exchange, directly or indirectly (such as
through an intermediary), that became your replacement property? . . . . . . . . . . . . . .
Yes
During this tax year (and before the date that is 2 years after the last transfer of property that was part of
the exchange), did you sell or dispose of any part of the like-kind property you received? . . . . . .
Yes
No
No
If both lines 9 and 10 are “No” and this is the year of the exchange, go to Part III. If both lines 9 and 10 are “No” and this is not
the year of the exchange, stop here. If either line 9 or line 10 is “Yes,” complete Part III and report on this year’s tax return the
deferred gain or (loss) from line 24 unless one of the exceptions on line 11 applies.
11
If one of the exceptions below applies to the disposition, check the applicable box:
a
The disposition was after the death of either of the related parties.
b
The disposition was an involuntary conversion, and the threat of conversion occurred after the exchange.
c
You can establish to the satisfaction of the IRS that neither the exchange nor the disposition had tax avoidance as one of
its principal purposes. If this box is checked, attach an explanation (see instructions).
For Paperwork Reduction Act Notice, see the instructions.
BAA
REV 10/27/14 PRO
Form 8824 (2014)
Page 2
Form 8824 (2014)
Name(s) shown on tax return. Do not enter name and social security number if shown on other side.
Your social security number
HOBART IDA
565-78-7878
Part III
Realized Gain or (Loss), Recognized Gain, and Basis of Like-Kind Property Received
Caution: If you transferred and received (a) more than one group of like-kind properties or (b) cash or other (not like-kind) property,
see Reporting of multi-asset exchanges in the instructions.
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Note: Complete lines 12 through 14 only if you gave up property that was not like-kind. Otherwise, go to line 15.
Fair market value (FMV) of other property given up . . . . .
12
Adjusted basis of other property given up . . . . . . . .
13
Gain or (loss) recognized on other property given up. Subtract line 13 from line 12. Report the
gain or (loss) in the same manner as if the exchange had been a sale . . . . . . . . .
14
Caution: If the property given up was used previously or partly as a home, see Property used as
home in the instructions.
Cash received, FMV of other property received, plus net liabilities assumed by other party,
. .
reduced (but not below zero) by any exchange expenses you incurred (see instructions)
15
FMV of like-kind property you received . . . . . . . . . . . . . . . . . . .
16
Add lines 15 and 16 . . . . . . . . . . . . . . . . . . . . . . . . .
17
Adjusted basis of like-kind property you gave up, net amounts paid to other party, plus any
exchange expenses not used on line 15 (see instructions) . . . . . . . . . . . . .
18
Realized gain or (loss). Subtract line 18 from line 17 . . . . . . . . . . . . . .
19
Enter the smaller of line 15 or line 19, but not less than zero . . . . . . . . . . . .
20
Ordinary income under recapture rules. Enter here and on Form 4797, line 16 (see instructions)
21
Subtract line 21 from line 20. If zero or less, enter -0-. If more than zero, enter here and on
Schedule D or Form 4797, unless the installment method applies (see instructions) . . . .
22
Recognized gain. Add lines 21 and 22 . . . . . . . . . . . . . . . . . . .
23
24
.
Deferred gain or (loss). Subtract line 23 from line 19. If a related party exchange, see instructions
Basis of like-kind property received. Subtract line 15 from the sum of lines 18 and 23
. .
25
Part IV
0.
900,000.
900,000.
825,000.
75,000.
0.
0.
0.
75,000.
825,000.
Deferral of Gain From Section 1043 Conflict-of-Interest Sales
Note: This part is to be used only by officers or employees of the executive branch of the Federal Government or judicial
officers of the Federal Government (including certain spouses, minor or dependent children, and trustees as described in
section 1043) for reporting nonrecognition of gain under section 1043 on the sale of property to comply with the
conflict-of-interest requirements. This part can be used only if the cost of the replacement property is more than the basis of
the divested property.
26
Enter the number from the upper right corner of your certificate of divestiture. (Do not attach a
copy of your certificate. Keep the certificate with your records.) . . . . . . . . . . a
27
Description of divested property a
28
Description of replacement property a
29
Date divested property was sold (month, day, year) .
.
.
.
.
30
Sales price of divested property (see instructions).
.
.
.
.
.
30
31
Basis of divested property
.
.
.
.
.
31
32
33
Realized gain. Subtract line 31 from line 30 . . . . . . . .
Cost of replacement property purchased within 60 days after date
of sale . . . . . . . . . . . . . . . . . . . .
.
34
Subtract line 33 from line 30. If zero or less, enter -0-
.
35
36
Ordinary income under recapture rules. Enter here and on Form 4797, line 10 (see instructions)
Subtract line 35 from line 34. If zero or less, enter -0-. If more than zero, enter here and on
Schedule D or Form 4797 (see instructions) . . . . . . . . . . . . . . . . .
35
37
Deferred gain. Subtract the sum of lines 35 and 36 from line 32
.
.
.
.
.
.
.
.
.
.
37
38
Basis of replacement property. Subtract line 37 from line 33 .
.
.
.
.
.
.
.
.
.
.
38
.
.
.
.
.
.
.
.
.
.
.
.
REV 10/27/14 PRO
.
.
.
.
.
.
.
.
.
.
.
.
29
.
.
.
.
.
.
.
32
.
.
.
.
.
.
.
34
33
.
36
Form 8824 (2014)
Filing California’s New §1031 Form
MULTIPLE OWNERS OR CHANGE IN OWNERSHIP
If the property is owned by multiple owners who are each filing their own tax returns, each
owner must complete Form 3840 to report his or her proportionate share of the gain in the year of
sale and subsequent years.
Owned by an entity
If the property is owned by a passthrough entity, such as a partnership, LLC, or S corporation,
the entity must file the form each year until the property is disposed of in a fully taxable transaction.
If the entity liquidates and the property is passed to the owners, the filing requirement passes to
the partners/members/shareholders who now own the property.
Example of property owned by entity
ABC LLC exchanged California property for Nevada property in 2014. In 2015, the
members of ABC cancelled the LLC and disposed of the property to each of the five
members, each of whom owned 20%. In 2015, the LLC and each of the members must file
Form 3840.
Single-member LLC
If the property is owned by a single-member LLC, the taxpayer files Form 3840 with the
individual return. If the single member takes in a new member, file the form with Form 568.
Example of single-member LLC versus LLC filing requirements
Rich is the single member of Rich Guy LLC, which owns rental property. In 2014, Rich
Guy LLC exchanges a California rental property for Nevada rental property.
In 2014, Rich files Form 3840 with his Form 540 because he is an SMLLC.
In 2015, Rich brings in an investor, and Rich Guy LLC is a two-member LLC. For 2015,
Form 3840 must be filed with Form 568.
Divorcing taxpayers
If a married couple divorces, whichever spouse receives the property is the taxpayer required to
file Form 3840. If both spouses own the property, each must file Form 3840.
Example of divorced taxpayers’ filing requirements
Will and Olivia, a married couple, exchange California rental property for Nevada
property in 2014. They file Form 3840 with their 2014 return. In 2015, they divorce. Olivia
is awarded the Nevada property in the divorce. She must file Form 3840 for subsequent
years.
If, however, they continue to hold the property jointly, each must file Form 3840.
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Filing California’s New §1031 Form
Married taxpayers filing separately
If married taxpayers file separately:
For property that is jointly owned, each spouse will file Form 3840 and report his/her share; or
For property that is the separate property of one of the spouses, file Form 3840 for that
spouse only.
•
•
 Practice Pointer
The law requires the owner of the property to file Form 3840. We believe that if there is a
question, the form should be filed by any taxpayer that is on the title to the property during the year.
Death of owner
If the owner of the property dies, and the property has a fully stepped-up basis, there is no gain
to report. In this situation, you file a final Form 3840, stating the reason. However, if the beneficiary
or another joint tenant owned the property, that taxpayer must continue to file Form 3840.
There is a box on the form that you check when filing the final Form 3840.
Example of final Form 3850
Joe and Jane exchanged California property in 2014 for property located in Nevada.
Although they were married, they held title as tenants in common.
When Joe died in 2015, he left the property to Jane. Because the property was not
community property, only one-half of the basis receives a step up, and Jane must continue
to file Form 3840 for each subsequent year because there is still deferred gain on the sale.
If Joe and Jane held the property as community property, the entire property would
have a step up in basis, and Jane would file a final Form 3840, stating she received a
stepped-up basis due to Joe's death.
PROPERTY EXCHANGED AGAIN
You must track and identify replacement property if that property is disposed of in a subsequent
exchange for property outside of California until the gain is fully recognized.
Example of subsequent exchanges
In 2014, Derrick exchanged a California apartment building and deferred the entire
gain into land in New Hampshire.
Assume that in 2015, he exchanges the New Hampshire land back into another
California apartment building and defers all or a portion of the gain.
He must continue to file Form 3840 with California whether he is a resident or
nonresident, even though the property is now located in California.
©2015
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Filing California’s New §1031 Form
APPORTIONMENT
Businesses must apportion income to California on page 2 of the form. Instructions for the current
year state to use the current apportionment factor. The FTB has not stated whether the taxpayer will
use the apportionment factor for the year of the sale or the apportionment factor for the year of
disposition. We hope the FTB will provide guidance prior to the release of the 2015 forms.
RESIDENCY OF SELLER
Seller is a resident
If the taxpayer is a resident of California when the out-of-state exchange property is sold, the
entire gain is taxable. Residents are taxed on income from all sources. If the taxpayer is a nonresident
when the property is sold, the lesser of the previously unrecognized gain or the total gain on
disposition is taxable to California according to the FTB.
Seller is a nonresident
If a nonresident taxpayer exchanges property located within California for property located
outside California, the realized gain will be sourced to California, although tax is not due until the
gain is recognized. This requires nonresidents to keep track of their deferred gains sourced to
California so that they can be reported to California in the year the gain is recognized.
If the replacement property is located outside California, the amount taxable to California is the
lesser of:
The amount of gain deferred on the original exchange; or
The gain on the sale of the new property.
•
•
Example of exchanging for property outside California
Jack, a resident of Texas, owned a condominium in California. Jack exchanged the
condominium for like-kind property located in Texas. There was no boot on the exchange,
and Jack deferred $15,000 of gain on the exchange.
Jack must recognize the lesser of the deferred gain of $15,000 or the gain recognized at
the time he disposes of the Texas property, assuming he does so in a non-deferred
transaction.
If the replacement property is located in California, all of the gain will be taxable on
the sale of the replacement property.
Example of exchanging for California property
Jane was a resident of Nevada when she exchanged Nevada business property for
like-kind California business property. Jane realized a $10,000 gain on the property that
was deferred because of the like-kind exchange.
Jane then sells the California property while still a resident of Nevada. Jane recognizes
$40,000 of gain (the original deferred $10,000 plus $30,000 of gain on the California
property) in a fully taxable disposition.
Because the property is located in California, the $40,000 gain is sourced to California.
©2015
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Spidell Publishing, Inc.®
Filing California’s New §1031 Form
PREPARER’S RESPONSIBILITY TO NOTIFY
The penalty for failing to file Form 3840 is severe: acceleration of the gain into the year the form
is not filed. We believe you should provide some sort of notification to the client so they don’t
unknowingly subject themselves to a penalty. We assume your software will include information in
the client letter. In addition to this, we suggest you:
•
•
•
•
Make sure your software does include language adequately alerting your client to the
requirement;
Highlight and tab the place in the letter where the language is;
Send an e-mail or letter in December reminding the client of the requirement; and
In late January, if you sent an e-mail in December, send a letter; if you sent a letter in
December, send an e-mail reminding the client of the requirement.
Client letter
For a client letter on this new requirement, go to:
 Website
www.caltax.com/spidellweb/public/editorial/LKEletter.doc
LIKE-KIND EXCHANGES: IRC §1031
BASIC EXCHANGE RULES
IRC §1031 provides an exception to the general rule for recognition of gain on the sale of property.
Under IRC §1031, if certain conditions are met, a taxpayer defers the gain from the sale of
property, either in part or in full. There are three general requirements:
•
•
•
There must be an exchange (as opposed to a separate sale and reinvestment);
The replacement property must be like-kind to the property given up; and
Both the property given up and the replacement property must be held for investment or
productive use in a trade or business. Property held for personal use or primarily for sale is
generally not eligible for nonrecognition treatment.
IRC §1031 and the related regulations lay out the following rules related to exchanges:
•
•
•
No gain or loss shall be recognized on the exchange of business or investment property if the
property is exchanged solely for property of like-kind, which is to be held either for
productive use in a trade or business or for investment (IRC §1031(a)(1));
Gain is recognized to the extent of cash or other boot (not like-kind property) received
(IRC §1031(b)); and
Net relief of the transferor taxpayer’s mortgage debt is considered boot received. (Treas.
Regs. §1.1031(b)-1)
Additionally, IRC §1031(a)(2) explicitly excludes certain property, such as partnership interest,
from like-kind treatment:
•
•
©2015
Gain on exchange of partnership interest cannot be deferred; and
Taxpayers sometimes report the exchange of tenants-in-common interest in partnership
property, when in reality a partnership interest was exchanged.
20
Spidell Publishing, Inc.®
Filing California’s New §1031 Form
If, at any time during the exchange, the taxpayer has receipt or control of any portion of the sales
proceeds, this will generally result in gain recognition. Further, if the taxpayer does not reinvest the
full amount of proceeds into eligible replacement property, or obtains other property in the
exchange (referred to as “boot”), this may also result in gain recognition.
 Practice Pointer
Although we think of an IRC §1031 exchange as being “allowed,” it is not an election. It is
simply a situation where neither gain nor loss is recognized when one asset is exchanged for
another. We rarely see a taxpayer go through the additional expense of an exchange of property to
defer loss, but when trading in cars or other machinery, the exchange creates a mandatory deferral
of tax consequences. If a taxpayer trades in a car, he or she is prevented from taking a loss on that
transaction, even if it is a business asset. A better option would be to sell the car, take the loss, and
then purchase a new car.
DEFERRED EXCHANGES
In many cases, taxpayers are not able to simultaneously exchange properties. Instead, they sell
their original property and then identify a new property to be purchased with those funds. These
exchanges are referred to as deferred, Starker, or delayed exchanges.
45- and 180-day rules
For any deferred exchanges, the following limits apply:
•
•
Identified: All properties to be received must be identified within 45 days of when the
taxpayer transfers the original property. (IRC §1031(a)(3)(A))
Received: The exchange of titles must be completed, or properties received, before the
earlier of:
180 days after the transfer of the exchanged property; or
The due date, including extensions, of the taxpayer’s tax return for the tax year the
relinquished property was transferred.
(IRC §1031(a)(3); Treas. Regs. §1.1031(k)-1(b)(1))
o
o
 Caution
Filing a tax return on time can make a like-kind exchange taxable. Prudent investors
participating in an exchange in the fourth quarter of the year should extend the filing date of their
tax return to maximize the replacement period to 180 days. A tax trap can occur by the 180 days “or,
if earlier, the due date of the tax return” requirement.
©2015
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Filing California’s New §1031 Form
Example of filing return
Joe, a calendar-year taxpayer, sells his property as the first step of a like-kind exchange
on December 31. Joe’s 180 days end on June 29 of the next year.
Joe identifies the new property he will be purchasing on February 2, within the
required 45-day period.
Joe needs his tax refund and files his return on April 15. This shortens the allowable
exchange period to 105 days.
Joe acquires the new property on April 30. Because Joe had not completed the
exchange by April 15, his gain is taxable. Had he filed an extension and waited to file his
return until the exchange was complete, his gain would have been deferred.
Penalty for noncompliance
If these dates (i.e., 45 and 180 days) are not strictly followed, any property received outside the
dates is considered “not-like-kind” property. Therefore, the tax-free transaction is deemed a taxable
sale and a subsequent purchase. (Treas. Regs. §1.1031(k)-1(a))
Once the old property is conveyed, the period for identifying the replacement property ends
exactly 45 days later, and the period for receiving the property ends exactly 180 days later — no
extensions are available (except for postponements for certain taxpayers affected by presidentially
declared disasters or a military or terrorist action, or for certain taxpayers serving in combat zones
and contingency operations). (IRC §7508A)
There is no exception for a taxpayer who identifies a replacement property that becomes
unavailable after the 45 days.
Example of losing property
Jason transfers his property to an accommodator on February 1. He properly identifies
a replacement property on March 1. However, the replacement property burns down on
April 1, and Jason is unable to complete the exchange.
Jason may not replace this property with a new property. Although the property was
subject to a casualty loss, it was not destroyed as part of a presidentially declared disaster.
AVOIDING CONSTRUCTIVE RECEIPT
For purposes of the like-kind exchange rules, the taxpayer is treated as receiving money or other
property when the money or other property is available to him or her. (Treas. Regs. §1.1031(k)-1(f)(2))
Once the taxpayer is treated as receiving the money or property, a taxable transaction has occurred.
To avoid constructive receipt, the funds from the “sale” of the taxpayer’s property must be held
in an account:
•
•
The terms of which restrict the taxpayer’s access to the funds; and
By an individual or entity who is not under the control of the taxpayer.
The use of a qualified intermediary (QI) to facilitate a like-kind exchange qualifies as a safe
harbor only if the agreement between the taxpayer and QI expressly limits the taxpayer’s right to
receive, pledge, borrow, or otherwise obtain the benefits of money or other property held by the
intermediary. (Treas. Regs. §1.1031(k)-1(g)(4)(ii))
©2015
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Filing California’s New §1031 Form
Who can be a QI?
A QI is a person who is not the taxpayer or a disqualified party and who enters into a written
agreement with the taxpayer, stating that the QI will perform specified duties. The QI:
•
•
•
•
Acquires the property to be relinquished by the taxpayer;
Transfers the relinquished property to the “buyer;”
Acquires the replacement property from the “seller;” and
Transfers the replacement property to the taxpayer.
(Treas. Regs. §1.1031(k)-1(g)(4)(iii))
A disqualified party is defined as:
•
•
•
A person who is the agent of the taxpayer;
A person who is related to the taxpayer; or
A person who is related to the taxpayer’s agent.
(Treas. Regs. §1.1031(k)-1(k)(1))
The regulations specify that a person who has been the taxpayer’s employee, attorney,
accountant, investment banker or broker, or real estate agent or broker within the two-year period
ending on the date of the transfer of the first relinquished property is treated as an agent of the
taxpayer. (Treas. Regs. §1.1031(k)-1(k)(2))
Comment
Based on the above, a tax professional cannot be his client’s QI.
In addition, the general rules of agency apply, and the IRS has looked to the following factors to
determine agency:
•
•
•
•
The agent is operating in the name of the principal and on the principal’s behalf;
The agent has the power to bind the principal;
The agent transmits money received to the principal; and
The receipt of income is attributable to the services of the principal and the principal’s
employees, and to the principal’s assets.
(PLRs 200630005, 200803003, 200803014)
An individual is related to the taxpayer if the individual bears a relationship defined in IRC §267
or §707(b). However, in applying the rules of those sections, a 10% interest is disqualifying rather
than the 50% described in those sections. As such, certain family members and certain entities in
which the taxpayer has a direct interest of 10% or more or an indirect interest through family
attribution are disqualified.
Lack of QI nullifies IRC §1031 exchange
The Tax Court ruled that a taxpayer’s sale and subsequent purchase of real property did not
qualify as a like-kind exchange because the intermediary was not qualified. (Blangiardo v. Comm.,
TCM 2014-110) The qualified intermediary was the taxpayer’s son, an attorney. However, under
Treas. Regs. §1.1031(k)-1(g)(4)(iii), family members including ancestors and lineal descendants are
disqualified persons, and the regulation makes no exception based on profession.
©2015
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Filing California’s New §1031 Form
REPLACEMENT PROPERTY VALUES IN IRC §1031 EXCHANGES
When executing an IRC §1031 exchange, failing to find replacement property in time, or
identifying too many replacement properties or properties above a certain value, will void the
exchange, and the gain will be taxable.
Replacement values
A taxpayer can identify more than one replacement property, but there are rules regarding the
number and the total value of those replacement properties.
Regardless of the number of relinquished properties transferred by the taxpayer as part of the
same deferred exchange, the maximum number of replacement properties that the taxpayer may
identify is:
•
•
Three properties without regard to the fair market values of the properties (the “threeproperty rule”) (Treas. Regs. §1.1031(k)-1(c)(4)(i)(A)); or
Any number of properties as long as their aggregate fair market value as of the end of the
identification period does not exceed 200% of the aggregate fair market value of all the
relinquished properties as of the date the relinquished properties were transferred by the
taxpayer (the “200% rule”). (Treas. Regs. §1.1031(k)-1(c)(4)(i)(B))
 Caution
Stick to the three-property rule and avoid the 200% rule if possible, because the fair market value
of the replacement properties isn’t likely to be known or easily proved (for example, offering prices
may be all that are available for those properties). If the IRS successfully challenges the valuation
under the 200% rule, the taxpayer could lose the tax-free exchange treatment.
Exceptions
If, at the end of the statutory 45-day identification period, a taxpayer has identified more than
three properties that have an aggregate fair market value that exceeds the 200% rule, the taxpayer
generally is treated as if no replacement property had been identified.
However, there are two exceptions. Even if a taxpayer has violated both the three-property rule
and the 200% rule, an appropriate identification is treated as having been made with respect to:
•
•
Any replacement property actually received by the taxpayer before the end of the 45-day
identification period; and
Any replacement property identified by the taxpayer before the end of the 45-day
identification period and received before the end of the exchange period, provided the
taxpayer receives property amounting to at least 95% of the aggregate fair market value of
all identified replacement properties before the end of the exchange period. This is known as
the “95% rule.” For this purpose, the fair market value of each identified property is
determined as of the earlier of:
The date the property is received by the taxpayer; or
The last day of the exchange period.
(Treas. Regs. §1.1031(k)1-(c)(4)(ii))
o
o
©2015
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Spidell Publishing, Inc.®
Filing California’s New §1031 Form
How to identify the replacement property (45-day rule)
The identification period begins on the date the taxpayer transfers the relinquished property and
ends at midnight 45 days after. (Treas. Regs. §1.1031(k)-1(b)(2)(i))
The property must be designated as replacement property in writing, signed, and delivered to
the person obligated to transfer the replacement property or to any other person involved in the
exchange (other than the taxpayer or a “disqualified person”). In other words, the document can
be delivered to any of the other parties to the exchange, an accommodator, an escrow agent, or a
title company. A document signed by all parties prior to the end of the 45 days is also sufficient.
(Treas. Regs. §1.1031(k)-1(c)(2))
A taxpayer can cancel an identification of replacement property at any time before the end of the
45-day identification period.
Because the identification period is a statutory requirement, requests for extension will not be granted.
Replacement value too high
A taxpayer’s exchange transaction failed the 45-day requirement, not because the taxpayer failed to
identify replacement property within 45 days, but because the FMV of the replacement properties violated
the 200% value requirement. (Appeal of Jinks (March 25, 2014) Cal. St. Bd. of Equal., Case No. 614126)
The taxpayer timely identified replacement properties within the 45-day period; however, the
relinquished property was sold for $6.5 million, and the replacement properties (five, in total) were
valued collectively at $17.4 million. One day after the 45-day period ended, the taxpayer submitted a
revocation of two of the properties. The taxpayer argued that the FTB had arbitrarily placed values
on the five properties to determine that the 200% rule had been violated, but he did not provide
evidence of alternative FMVs.
Note: If the taxpayer had initially only identified three properties, the whole issue of FMV
would not have come into play; because five properties were identified, the taxpayer was subject to
the 200% limitation.
No deferred gain for disguised related-party transactions
A taxpayer’s IRC §1031 exchange program failed the rules regarding related-party exchanges,
where the taxpayer brought in a party unnecessary to the transaction in an attempt to avoid
recognition of income. (North Central Rental & Leasing (March 2, 2015) U.S. Court of Appeals for
the Eighth District, Case No. 13-3411)
The taxpayer was exchanging property with a subsidiary company (a related party), and was
using a QI to attempt to get around the two-year holding period rule that applies to related-party
exchanges. (IRC §1031(f)) That rule provides that if related parties exchange property, they must
hold the property for two years before the exchanges qualify for nonrecognition treatment. The
transactions through the QI were structured to allow the taxpayer to dispose of the properties before
the end of this holding period and also allowed one of the parties unrestricted access to the proceeds
of the sale for a period of six months.
In a nutshell, North Central (a subsidiary of Butler Machinery) sold used equipment to third
parties. The proceeds of those sales would transfer to Accruit, the QI. Accruit then sent the proceeds
to Butler’s main bank account, and Butler purchased new equipment from Caterpillar. The new
equipment was then transferred to North Central. However, Butler had special financing terms with
©2015
25
Spidell Publishing, Inc.®
Filing California’s New §1031 Form
Caterpillar, which allowed Butler up to six months to pay the invoice for that property. Therefore,
during that time, Butler had unrestricted access to the funds.
The court found that the exchanges were occurring between related parties with the intent to
avoid tax, and were therefore not eligible for nonrecognition under IRC §1031(f).
Upgrade to new property
In a 2013 California case, a taxpayer exchanged Nevada property for Ohio property and Hawaii
property. (Appeal of Barsell (September 10, 2013) Cal. St. Bd. of Equal., Case No. 552835) The FTB
argued that the taxpayer had boot to the extent of $456,475. The taxpayer argued that the cash was
for improvements to the Hawaii property done before escrow closed and correctly pointed out that
property does not have to be in a completed state at the time of identification or even at the time the
escrow closes. (Treas. Regs. §1.1031(k)-1(e)(3)(iii))
However, the taxpayer did not provide documentation such as receipts or cancelled checks to
substantiate the improvement costs to the Hawaii property and was therefore liable for additional tax.
FTB CONTINUES TO AUDIT IRC §1031 EXCHANGES
California conforms to IRC §1031, but these exchanges continue to be a top audit issue for the FTB.
According to the FTB, common issues include:
•
•
•
•
•
Gains not being properly sourced to California upon disposition of non-California
replacement property received in a California deferred exchange;
Taxpayers who fail to report other property (boot) in the exchange;
Taxpayers who do not meet identification or other technical requirements of IRC §1031;
Relinquished and/or replacement property is not held for investment or for productive use in a
trade or business (i.e., property is used for personal purposes or is held primarily for sale); and
The taxpayer who transfers relinquished property is a different taxpayer than the party who
acquires replacement property.
Taxpayer held cash
In the Han case, the like-kind exchange treatment was disallowed because the taxpayer received
the cash from the transaction. (Appeal of Howard B. Han and Seung W. Han (April 24, 2013) Cal. St.
Bd. of Equal., Case No. 577081)
It was a stretch whether like-kind property was even involved in this case. Han sold corporate
stock and then purchased an annuity with the proceeds. He tried to argue that even though the
statute excludes stock from like-kind treatment, it represented his entire interest in his business.
The larger problem was that the taxpayer held the cash during the exchange. He tried to argue
this point too, claiming the FTB interpreted the term “exchange” too narrowly, and that the courts
have given IRC §1031 a liberal interpretation and allowed taxpayers some latitude in structuring an
exchange if the parties truly intended to have one. Sorry, no good — he took receipt of unrestricted
cash consideration for the sale of stock. It was a taxable sale.
Failed exchange is not reasonable cause for late filing
The Bordeaux case doesn’t deal with the merits of an IRC §1031 exchange reported on the return,
nor the calculation of deferred gain, but rather is an appeal for the assessment of $3,452 for late and
underpayment penalties, and interest. (Appeal of Bryan G. Bordeaux and Lorri Bordeaux (April 24,
©2015
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Spidell Publishing, Inc.®
Filing California’s New §1031 Form
2013) Cal. St. Bd. of Equal., Case No. 571434) The taxpayers contended that circumstances
surrounding the IRC §1031 exchange represent cause for abatement.
The taxpayers sold, and closed escrow on, a commercial building on December 31, 2009. The
proceeds were placed in an account with an exchange company. The replacement property was then
acquired in mid-June of 2010, within the 180-day time period provided in IRC §1031(a)(3). Due to
the date of the consummation of the exchange, the taxpayers argued reasonable cause as the basis
for requesting penalty, and even interest, abatement.
The Board didn’t buy their arguments, pointing out that since the taxpayers could identify
replacement property as late as February 14, 2010, under the 45-day provision of IRC §1031(a)(3), they
should have been able to reasonably estimate their 2009 tax liability and pay it by the extension date of
April 15, 2010. This would have avoided the late-payment penalty and interest. Furthermore, even
after acquiring the replacement property in mid-June, no payment was remitted until October 15.
Therefore, the FTB’s assessment of penalties and interest was affirmed. IRC §1031 exchanges
consummated over two tax periods provide no cause for ignoring one’s estimated tax and payment
obligations.
Taxpayer didn’t own the property!
The Stringer case involves an attempted $3 million IRC §1031 exchange in which the appellants
never actually owned the relinquished property. (Appeal of Scott L. Stringer and Irene
Stringer (January 17, 2013) Cal. St. Bd. of Equal., Case No. 609814)
Stringer is a property developer, with the Board referring to him as an expert in the land entitlement
process (the legal method of obtaining approvals for the right to develop property for a particular use).
The property at the heart of the case evolved through a series of events involving several other
parties. They were events in the sense that three parcels of land were acquired, combined, and then
carved into two parcels, with both owned by other parties working together with Stringer. One of
the parcels was sold, with $3,677,435 of the sales price allocated to Stringer by the seller. He reported
$677,435 as taxable income and asked the seller to retain $3,000,000, which was then used to
purchase another property, thereby supposedly completing the exchange.
The FTB’s contention was the entire $3,677,435 represented taxable compensation to Stringer for
his services and expertise in helping expedite the overall deal. Due to the terms of the deal, the
Board found that Stringer never actually owned an interest in the property in question, but merely
possessed an interest in the contractual and potential negotiating opportunities to buy the
underlying parcel, stating that the option to acquire property does not equal ownership interest in
the underlying property.
Stringer tried to support his case with the following example: A horse trainer is given a horse as
a $10 payment for work done, trains the horse to increase its value, the horse wins the Kentucky
Derby, and the horse is sold for $1,000,010, with the $1 million proceeds put into a like-kind
exchange for another horse. He claimed the trainer, in the end, received $10 in ordinary income and
another $1 million in deferred gain, which, he also claimed, was analogous to his fact pattern. The
Board was unmoved by this homespun example, pointing out a huge hole in the analogy — the
horse trainer actually owned the horse he exchanged.
Bottom line: One cannot execute an IRC §1031 exchange with property one does not own.
©2015
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Spidell Publishing, Inc.®
Filing California’s New §1031 Form
GLOSSARY
§1031 exchange: a §1031 exchange (like-kind exchange) does not recognize gain if the replacement
property is like-kind. The transferred and received properties must be held for productive use in
either a trade or business or for investment. There are certain rules for like-kind exchanges between
related parties
Annuity: series of equal periodic payments or receipts. Examples of an annuity are semiannual
interest receipts from a bond investment and cash dividends from a preferred stock
Asset: a resource expected to provide future economic benefits. Anything owned that has monetary
value. Any interest in real or personal property. Property, including cash, that has value
Basis: a figure or value that is the starting point in computing gain or loss, depreciation, depletion,
or amortization
Beneficiary: an individual who will receive an inheritance upon the death of another
Community property: generally, community property consists of all property (and debts) acquired
during marriage, except property received by inheritance or gift, or property owned before marriage
Gain: excess of money or fair value of property received on sale or exchanged over the carrying
value of the item
Holding period: a time interval that property has been owned by the entity
Like kind exchange: a reciprocal transfer of property without the substantial interjection of cash
Partnership: form of business organization created by an agreement between two or more persons
who contribute capital and/or their services to the organization
Safe harbor: a provision in the Code or regulations which sets out terms or conditions that, if met
and are compiled with, assure a particular tax result. Safe harbor provisions are helpful in
connection with vague or confusing areas of the tax law
Separate property: anything owned separately that would not need to be divided between spouses.
For example, separate property generally includes anything owned before the marriage, any
property received by gift or inherited, and any property acquired after the separation
Tax year: an annual accounting period for reporting income and keeping records
Trust: an agreement in which the trustee takes title to property (called the corpus) owned by the
grantor (donor) to protect or conserve it for either the grantor or the trust’s beneficiary. The trust is
established by the grantor. The trustee is typically given authority to invest the property for a return.
Trust may be revocable or irrevocable
©2015
Spidell Publishing, Inc.®
Filing California’s New §1031 Form
INDEX
2
200% rule ..................................................... 24, 25
9
95% rule ............................................................. 24
A
Agent ........................................................... 23, 25
B
Beneficiary......................................................... 18
C
Client letter ....................................................... 20
Community property ...................................... 18
I
Income tax ........................................................... 2
IRC §1031 .................................. 1, 2, 20, 21, 23-27
L
Like-kind exchange ........... 1, 2, 19, 21-23, 26, 27
LLC ..................................................................... 17
N
Net income .......................................................... 3
Nonresident ................................................. 18, 19
D
Deferred................................... 3, 10, 18-22, 24-27
Disqualified person ......................................... 25
P
Passthrough entity............................................ 17
Postponements .................................................. 22
Principal ............................................................. 23
Prior-year exchange ........................................... 3
F
Form 540 ............................................................ 17
Form FTB 3840 ........................................... 1-3, 10
Franchise Tax Board (FTB)...... 1-3, 10, 19, 25-27
Q
Qualified intermediary (QI) ................ 22, 23, 25
R
Replacement property values in IRC §1031 .. 24
G
Gain ...................................... 2, 3, 10, 17-22, 24-27
S
Sale................................... 10, 17-20, 22, 23, 25, 26
Stringer case ....................................................... 27
©2015
Spidell Publishing, Inc.®
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complaints or refunds, contact Spidell Publishing at (714) 776-7850. There are no prerequisites or advanced preparation required.
These webinars are designed to meet the requirements for 2 hours of continuing education. These webinars have been designed to meet the requirements of the IRS Return Preparer Office; including sections 10.6 and 10.9 of Department of
Treasury’s Circular No. 230 (Provider No. CRA7E); the California State Board of Accountancy; the California Bar Association; and the California Tax Education Council. This does not constitute an endorsement by these groups. The state boards of
accountancy have final authority on the acceptance of individual courses for CPE credit. For more information regarding administrative policies such as complaints or refunds, contact Spidell Publishing at 714-776-7850. There are no prerequisites
required. A listing of additional requirements to renew tax preparer registration may be obtained by contacting CTEC at P.O. Box 2890, Sacramento, CA 95812-2890, or by phone at 877-850-2832, or on the internet at www.CTEC.org.
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Spidell’s Quarterly Tax Update Webinars
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Spidell’s Quarterly Tax Update Webinars
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