State Claw-Back (Deferred Gain Tracking)

Each state writes the claw-back as a sourcing rule, and two of them make you report every year.

California's FTB 3840 instructions say the source of gain on California property is fixed when it is realized and preserved whenever it is recognized. For taxable years beginning on or after January 1, 2014, anyone who exchanges California property for out-of-state like-kind property files Form FTB 3840 for the year of the exchange and each later year, generally until the California-sourced deferred gain is recognized. Our FTB 3840 entry covers the form line by line.

Oregon's Form OR-24 instructions require the form for the year you transfer Oregon business or investment property in a like-kind exchange for property outside Oregon, and annually thereafter until the like-kind property is disposed of.

Montana's Admin. R. 42.2.308 says gain realized on Montana property retains its Montana source character and must be reported if and when it is recognized federally. Massachusetts regulation 830 CMR 62.5A.1(3)(d) does not tax deferred gain at the exchange, but treats the part of a later gain reflecting appreciation of Massachusetts real estate as Massachusetts-source income.

Worked example: Montana's own regulation shows the split between taxed and deferred gain.

Example 1 in the Montana rule: a nonresident relinquishes unimproved Montana land worth $100,000 with a $10,000 basis, receives Wyoming property worth $90,000 plus $10,000 cash, and pays $2,000 of exchange expenses. The $88,000 realized gain on Form 8824 is Montana-source income. Of it, $8,000 is recognized and reportable in the year of sale, and $80,000 is deferred and must be reported to Montana if and when it is recognized federally.

The rule also handles chains. If the Montana property was itself replacement property for an out-of-state property, Montana-source income excludes the gain deferred from that earlier exchange. Keep every Form 8824 in the chain so the split can be proved.

Where it bites: moving away, DST exits and the final taxable sale.

Moving to a state with no income tax does not end the claim. When a DST interest or other replacement is finally sold for cash, the original state can tax its share of the gain as a nonresident's source income; see whether a 1031 defers state capital gains tax and DST multi-state tax issues.

California adds an enforcement point. Its instructions say that if you fail to file Form FTB 3840 and do not file a return, the Franchise Tax Board may issue a proposed assessment for the deferred gain plus penalties and interest. The state pages for California and Oregon cover the rest of each state's exchange rules.