Does California tax a 1031 exchange into another state?

Not at the time of the exchange. California tracks the deferred California gain through an annual FTB 3840 filing, and when you later sell the out-of-state replacement property in a taxable sale, the California-source gain is the lesser of the deferred California gain or the gain actually recognized.

Who has to file FTB Form 3840?

Anyone who exchanged California property for replacement property outside California in a taxable year beginning on or after January 1, 2014, and deferred gain under IRC 1031. It's filed for the year of the exchange and every year after until the deferred gain is recognized, even if you have no other California filing requirement.

Does a 1031 exchange avoid California withholding on Form 593?

Mostly. The QI withholds nothing if you certify a deferred exchange, but withholding still applies to boot over $1,500, or to the whole sales price if the exchange fails.

California 1031 Clawback and Other State 1031 Exchange Rules

If you exchange California real estate for property in another state, California doesn’t tax the deferred gain at the exchange, but it keeps a claim on it. Under Revenue and Taxation Code 18032 you file FTB Form 3840 every year until that gain is recognized, and when you eventually sell, California taxes its share even if you’ve moved away. That’s what people mean by the California clawback.

Oregon has a similar add-back with its own annual form, Massachusetts and Montana have sourcing rules, and several states withhold at closing unless you document the exchange.

State rules at a glance

State	Rule	Form	When it bites
California	R&TC 18032 tracks deferred California gain	FTB 3840, every year	Later taxable sale of the out-of-state replacement property
California	R&TC 18662 withholding on the relinquished sale	Form 593	Boot over $1,500, or a failed exchange
Oregon	ORS 316.738 add-back	OR-24, every year	Later taxable sale of out-of-state replacement property
Massachusetts	830 CMR 62.5A.1 sourcing	No annual form	Later disposition of the replacement property
Massachusetts	Nonresident withholding on sales of $1M or more	Form NRW with Transferor’s Certification	At closing, from Nov 1, 2025
Montana	ARM 42.2.308 sourcing	No annual form	When the gain is recognized federally
Hawaii	HARPTA, HRS 235-68	N-289 (exemption), N-288/N-288A	At closing; 7.25% if any gain is recognized
Colorado	C.R.S. 39-22-604.5 withholding	DR 1083	At closing over $100,000; no 1031 box
Georgia	O.C.G.A. 48-7-128 withholding	IT-AFF3	At closing; 3% unless exempt
New York	Tax Law 663 estimated tax	IT-2663, box 4B	At deed recording
Pennsylvania	Act 53 of 2022 conformity	n/a	1031 applies for tax years beginning after Dec 31, 2022

California: R&TC 18032 and FTB 3840

The rule applies when gain on an exchange of property in California is deferred under IRC 1031 and the replacement property is outside California. It covers exchanges in taxable years beginning on or after January 1, 2014 (18032(d)).

The taxpayer who did the exchange files. Form 3840 is attached to the California return. If you have no other California filing requirement (say you’ve moved to Texas and have no California income), you still file it on its own as an information return. The FTB’s 3840 instructions cover the year-by-year details.

You file for the year of the exchange and every year after, until the deferred California gain is recognized. A second exchange doesn’t end the obligation. If you swap the Texas property for one in Arizona, you keep filing.

Skipping it has a cost. Under 18032(b), if you fail to file both the information return and a tax return, the FTB may estimate your net income, including the deferred gain, and propose tax, interest and penalties under R&TC 19087. The FTB says it may issue a Notice of Proposed Assessment for the previously deferred gain.

On the later sale, the California-source gain is the lesser of the deferred California gain or the gain actually recognized.

Worked example

Round numbers, for illustration only. Closing costs and depreciation on the replacement property are ignored to keep the arithmetic clean.

You sell a California rental for $1,000,000. Your adjusted basis is $400,000, so the realized gain is $600,000. Through a QI you buy a Texas rental for $1,100,000, adding $100,000 of new cash. No boot, so all $600,000 is deferred.

Basis in the Texas property: $400,000 carried over + $100,000 new cash = $500,000.
Each year you file FTB 3840 reporting the exchange and the $600,000 of deferred California gain.

Years later you sell the Texas property for $1,300,000 in a taxable sale.

Federal gain: $1,300,000 - $500,000 = $800,000.
California-source gain: lesser of $600,000 (deferred California gain) or $800,000 (gain recognized) = $600,000.

The $200,000 of appreciation that happened while you held Texas property isn’t California-source under this rule. If instead the Texas property sold for $900,000, federal gain would be $400,000, and California’s share would be the lesser figure, $400,000.

For the federal side of the Texas sale, see depreciation recapture and the capital gains tax calculator.

Form 593 withholding on the California sale

California also withholds on sales of California real estate under R&TC 18662. In a deferred exchange, the QI does the withholding, not the escrow officer. You certify the exchange on Form 593 (Part IV, box 10), and no withholding is taken at closing. Withholding still applies if:

boot exceeds $1,500: 3 1/3% of the boot; or
the exchange fails, doesn’t happen, or doesn’t qualify: 3 1/3% of the total sales price.

Using the example: $50,000 of boot means withholding of 3 1/3% × $50,000 = about $1,667. A failed exchange on the $1,000,000 sale means about $33,333. Either way, you can elect the alternative withholding calculation in Part VI of the form, based on gain rather than price.

In a cash-poor exchange (one where the QI isn’t holding enough cash to cover the withholding), the QI’s obligation has been limited to the funds it has since January 1, 2022, per the same instructions. The QI files Form 593 by the 20th day of the month after escrow closes (2026 instructions). A QI that fails to withhold owes the greater of $500 or 10% of the required amount; a seller who knowingly signs a false certificate owes the greater of $1,000 or 20%.

Oregon: ORS 316.738 and Form OR-24

ORS 316.738 applies when gain is deferred under IRC 1031 (or 1033) and the replacement property is outside Oregon. When you later sell in a sale that’s taxable federally but wouldn’t otherwise count for Oregon, you add back the gain that existed at the exchange. The add-back compares your adjusted basis with the lower of the property’s fair market value at the exchange date or at the sale date. If basis is higher, it’s a subtraction.

Form OR-24 is used only for exchanges of Oregon business or investment property for property outside Oregon. You file it for the year of the transfer “and annually thereafter” until you dispose of the replacement property, one form per exchange, attached to your Oregon return (OR-40, OR-20, OR-65 and the other Oregon returns). With no Oregon filing requirement, you submit it through Revenue Online.

Massachusetts: sourcing and the new withholding

Massachusetts doesn’t tax gain on real property deferred under 1031. But under 830 CMR 62.5A.1, when you later dispose of the property acquired in the exchange, the part of the gain reflecting appreciation of Massachusetts real estate is Massachusetts-source income. We found no annual tracking form like FTB 3840.

For closings on or after November 1, 2025, sales of Massachusetts real estate with a gross price of $1,000,000 or more require the closing agent to file Form NRW with a Transferor’s Certification for each seller, within 10 days of closing. The default withholding is 4% of the gross price, with more for individuals above the surtax threshold. The Transferor’s Certification has an oval for a seller who “will be deferring all or part of the gain under Code § 1031 using a qualified intermediary,” which reduces withholding by the part of the price tied to deferred gain. Claiming it means consenting to personal jurisdiction in Massachusetts for the tax due when the gain is realized. With no certification, the agent withholds on the full gross price.

Massachusetts limits like-kind treatment to real property for transfers on or after January 1, 2022 (TIR 23-5).

Montana

Under ARM 42.2.308, gain realized on Montana property relinquished in a 1031 exchange is generally Montana-source income, reportable if and when it’s recognized federally, and it keeps that character even if the replacement property is out of state. The reverse also holds: Montana property acquired for out-of-state property doesn’t carry the earlier out-of-state gain into Montana-source income. We didn’t find a Montana annual tracking form, so check the current rule text with your preparer.

Withholding states at closing

These states don’t track gain after the exchange. They withhold at the sale unless you document it.

Hawaii (HARPTA)

The buyer withholds 7.25% of the amount realized unless the seller provides Form N-289. N-289 works for a 1031 exchange, and the replacement property doesn’t have to be in Hawaii. But if any gain is recognized in the exchange, N-289 can’t be used and the buyer withholds the full 7.25%. Form N-288B (a withholding certificate) is the alternative, filed at least 10 working days before transfer. The buyer files N-288 and N-288A by the 20th day after transfer.

Colorado

For nonresident sellers on sales over $100,000, the withholding is the lesser of 2% of the price or net proceeds, reported on DR 1083 within 30 days of closing. There’s no 1031 box. The closest affirmation is box 12e, that no Colorado income tax is reasonably estimated to be due on the gain.

Georgia

Under O.C.G.A. 48-7-128, the buyer withholds 3% of the price from a nonresident seller. Form IT-AFF3 lets the seller certify that the sale is a like-kind exchange and the income isn’t subject to federal or state tax.

New York

A 1031 exchange isn’t one of the exemptions in Tax Law 663(c), so a nonresident still files IT-2663 when the deed is recorded. You skip Part 2, mark box 4B (“not required to recognize any gain”), and note that it’s an IRC 1031 exchange, so no estimated tax is paid. IT-2663-V is still completed.

Pennsylvania now follows 1031

Pennsylvania’s personal income tax historically didn’t follow 1031. Act 53 of 2022 amended section 303(a.5) of the Tax Reform Code to make IRC 1031 applicable, for transactions in tax years beginning after December 31, 2022. The change doesn’t reach earlier tax years.

If you’re exchanging out of one of these states, your CPA or tax attorney should confirm which forms apply to your facts before the relinquished property closes. Ask any QI you interview whether it handles these filings; choosing a qualified intermediary covers what else to check.

Sources

About the author

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