The qualified intermediary manages the exchange mechanics, but basis, depreciation, and boot questions belong to the investor's CPA or tax advisor, and coordinating that relationship early keeps a Santa Barbara exchange from stalling on a question that should have been answered weeks earlier in the process.
Basis Carryover and Depreciation Recapture
Replacement property in a 1031 exchange generally carries over the relinquished property's adjusted basis rather than starting fresh at the purchase price, and that carryover affects future depreciation schedules on the new asset. An investor's CPA needs the relinquished property's depreciation history well before closing on the replacement, since building a new depreciation schedule without that history creates work that has to be redone later.
Where the relinquished property included multiple assets with different depreciation schedules, such as a building combined with site improvements depreciated on a shorter schedule, the CPA needs each schedule separately rather than a single blended number, since the carryover calculation treats each component differently on the replacement side. Requesting the full depreciation schedule from the seller's accountant, rather than only the summary tax basis figure, gives the CPA the detail needed to do this correctly.
California Reporting for Out-of-State Exchanges
California requires ongoing reporting, through Form FTB 3840, when a California investor exchanges into a replacement property located outside the state, tracking the deferred California-source gain until it is eventually recognized. This is a coordination point specific to California investors and should be flagged to the CPA at the time the exchange is planned, not discovered during a later tax filing season.
The FTB 3840 filing continues annually for as long as the deferred California-source gain remains unrecognized, which can span many years if the investor continues to exchange rather than sell outright, and a Santa Barbara investor building a long-term exchange strategy should understand that this reporting obligation follows the gain rather than ending when the current exchange closes.
Boot Exposure Review
Any cash, debt relief, or non-like-kind property received in the exchange can create boot, which is taxable even within an otherwise successful exchange. A CPA reviewing the relinquished sale proceeds against the replacement purchase price and the new loan amount can flag boot exposure before closing, when there is still time to adjust the replacement offer or bring additional cash to the deal.
Debt reduction on the replacement side creates a form of boot that is sometimes overlooked, since an investor moving from a heavily leveraged relinquished property into a replacement with a smaller loan balance can trigger taxable boot from the debt relief alone, even if no cash actually changes hands at the closing table.
- relinquished property depreciation history
- replacement purchase price and new loan terms
- FTB 3840 reporting obligation for out-of-state replacement
- boot exposure from cash or debt relief
- Form 8824 preparation timeline
Timing the CPA's Involvement
Bringing the CPA in only after the relinquished property closes leaves less room to adjust the replacement strategy if a boot or basis issue turns up. A Santa Barbara investor should loop the CPA in once the relinquished sale is under contract, giving the advisor time to review numbers alongside the qualified intermediary before the 45-day identification window opens.
Where the investor is also weighing a Delaware statutory trust or other passive structure alongside a direct purchase, the CPA's input on how that structure interacts with basis and future estate planning goals is worth gathering early, since switching strategies after the identification window opens narrows the available options considerably.
Coordinating the Final Tax Filing
The CPA ultimately files Form 8824 reporting the exchange, and that filing needs accurate closing statements from both the relinquished sale and the replacement purchase, along with the intermediary's exchange documents. Assembling this file as the exchange progresses, rather than gathering it all at tax time, reduces the chance of a missing document holding up the filing.
A Santa Barbara investor running more than one exchange in the same tax year should keep each exchange's documentation separate from the start, since combining files across transactions makes it harder for the CPA to trace which closing statement and which identification notice belong to which Form 8824.
Common 1031 Exchange Questions
Does the qualified intermediary handle the investor's tax filing?
No. The intermediary manages funds custody and exchange documentation. The CPA or tax advisor prepares Form 8824 and handles basis, depreciation, and boot questions, working from the intermediary's closing records.
What is Form FTB 3840 and when does it apply?
It is a California reporting form required when a California investor exchanges into replacement property outside the state, tracking the deferred gain until it is later recognized. It should be flagged to the CPA when the exchange is first planned, not after the relinquished property has already closed.
What creates boot in an otherwise successful exchange?
Receiving cash, having debt relief without replacing it, or acquiring non-like-kind property alongside the replacement can all create boot, which is taxable even though the rest of the exchange qualifies for deferral under the general rule.
When should the CPA get involved in the exchange process?
As soon as the relinquished property is under contract, rather than after closing. That timing gives the CPA room to flag basis, boot, or reporting issues before the identification window opens and options start to narrow.
