2023 Instructions for California Schedule D (540) California Capital Gain or Loss Adjustment

References in these instructions are to the Internal Revenue Code (IRC) as of January 1, 2015, and to the California Revenue and Taxation Code (R&TC).

General Information

In general, for taxable years beginning on or after January 1, 2015, California law conforms to the Internal Revenue Code (IRC) as of January 1, 2015. However, there are continuing differences between California and federal law. When California conforms to federal tax law changes, we do not always adopt all of the changes made at the federal level. For more information, go to ftb.ca.gov and search for conformity. Additional information can be found in FTB Pub. 1001, Supplemental Guidelines to California Adjustments, the instructions for California Schedule CA (540), California Adjustments – Residents, or Schedule CA (540NR), California Adjustments – Nonresidents or Part-Year Residents, and the Business Entity tax booklets.

The instructions provided with California tax forms are a summary of California tax law and are only intended to aid taxpayers in preparing their state income tax returns. We include information that is most useful to the greatest number of taxpayers in the limited space available. It is not possible to include all requirements of the California Revenue and Taxation Code (R&TC) in the instructions. Taxpayers should not consider the instructions as authoritative law.

Registered Domestic Partners (RDPs)

For purposes of California income tax, references to a spouse, husband, or wife also refer to a California RDP, unless otherwise specified. When we use the initials RDP, they refer to both a California registered domestic “partner” and a California registered domestic “partnership,” as applicable. For more information on RDPs, get FTB Pub. 737, Tax Information for Registered Domestic Partners.

Purpose

Use California Schedule D (540), California Capital Gain or Loss Adjustment, only if there is a difference between your California and federal capital gains and losses.

Get FTB Pub. 1001 for more information about the following:

  • Disposition of property inherited before 1987.
  • Gain on the sale or disposition of a qualified assisted housing development to low-income residents or to specific entities maintaining housing for low-income residents.
  • Capital loss carryback.

Important Information

Installment Sales

If you sold property at a gain (other than publicly traded stocks or securities) and you will receive a payment in a tax year after the year of sale, report the sale on the installment method unless you elect not to do so. Get form FTB 3805E, Installment Sale Income. Also, use that form if you received a payment in 2023 for an installment sale made in an earlier year.

You may elect not to use the installment sale method for California by reporting the entire gain on Schedule D (540) (or Schedule D-1, Sales of Business Property, for business assets) in the year of the sale and filing your return on or before the due date.

At-Risk Rules and Passive Activity Limitations

If you dispose of (1) an asset used in an activity to which the at-risk rules apply, or (2) any part of your interest in an activity to which the at-risk rules apply, and you have amounts in the activity for which you are not at risk, get and complete federal Form 6198, At-Risk Limitations, using California amounts to figure your California deductible loss under the at‑risk rules. Once a loss becomes allowable under the at-risk rules, it becomes subject to the passive activity rules. Get form FTB 3801, Passive Activity Loss Limitations.

Capital Assets

The federal Tax Cuts and Jobs Act (TCJA) amended IRC Section 1221 excluding a patent, invention, model or design (whether or not patented), and a secret formula or process held by the taxpayer who created the property (and certain other taxpayers) from the definition of a capital asset. California does not conform. Report your capital assets on Schedule D (540).

Gross Income Exclusion for Bruce’s Beach

Effective September 30, 2021, California law allows an exclusion from gross income for the first time sale in the taxable year in which the land within Manhattan State Beach, known as “Peck’s Manhattan Beach Tract Block 5” and commonly referred to as “Bruce’s Beach” is sold, transferred, or encumbered. A recipient’s gross income does not include the following:

  • Any sale, transfer, or encumbrance of Bruce’s Beach;
  • Any gain, income, or proceeds received that is directly derived from the sale, transfer, or encumbrance of Bruce’s Beach.

Specific Line Instructions

Line 1 – List each capital asset transaction

Column (a) – Description of property. Describe the asset you sold or exchanged.

Column (b) – Sales price. Enter in this column either the gross sales price or the net sales price. If you received federal Form 1099-B, Proceeds From Broker and Barter Exchange Transactions; federal Form 1099-S, Proceeds From Real Estate Transactions; or similar statement showing the gross sales price, enter that amount in column (b). However, if box 6 of federal Form 1099-B indicates that net proceeds were reported to the Internal Revenue Service, enter that net amount in column (b). If you entered the net amount in column (b), do not include the commissions and option premiums in column (c).

Column (c) – Cost or other basis. In general, the cost or other basis represents the cost of the property plus purchase commissions and improvements, minus depreciation, amortization, and depletion. Enter the cost or adjusted basis of the asset for California purposes. Use your records and California tax returns for years before 1987 to determine the California amount to enter in column (c). If you used an amount other than cost as the original basis, your federal basis may be different from your California basis. Other reasons for differences include:

  • Depreciation Methods and Property Expensing – Before 1987, California law disallowed the use of accelerated cost recovery system and disallowed the use of an asset depreciation range 20 percent above or below the standard rate. California has different limits on the expensing of property under IRC Section 179. California law permitted rapid write-off of certain property such as solar energy systems, pollution control devices, and property used in an Enterprise Zone, Local Agency Military Base Recovery Area, Targeted Tax Area, or Los Angeles Revitalization Zone.
  • Inherited Property – The California basis of property inherited from a decedent is generally the fair market value at the time of death.
  • S Corporation Stock – Prior to 1987, California law did not recognize S corporations; therefore, your California basis in S corporation stock may differ from your federal basis. In general, your California basis will be cost-adjusted for income, loss, and distributions received after 1986, while your stock was California S corporation stock. Your federal basis will be cost-adjusted for income, loss, and distributions received during the time your stock qualified for federal S corporation treatment. Effective for taxable years beginning on or after January 1, 2002, any corporation with a valid federal S corporation election is considered an S corporation for California purposes. Existing law already requires federal C corporations to be treated as C corporations for California purposes.
  • Special Credits – California law authorizes special tax credits not allowed under federal law or computed differently under federal law. In many instances if you claimed special credits related to capital assets, you must reduce your basis in the assets by the amount of credit.

Other adjustments may apply differently to the federal and California basis of your capital assets. Figure the original basis of your asset using the California law in effect when the asset was acquired, and adjust it according to provisions of California law in effect during the period of your ownership.

Column (e) – Gain

  • Qualified Small Business Stock – California does not conform to the qualified small business stock deferral and gain exclusion under IRC Sections 1045 and 1202. Enter the entire gain realized in column (e).
  • Qualified Opportunity Zone Funds – California does not conform to the deferral and exclusion of capital gains reinvested or invested in qualified opportunity zone funds under IRC Sections 1400Z-1 and 1400Z-2. Enter the entire gain amount in column (e). If, for California purposes, gains from investment in qualified opportunity zone property had been included in income during previous taxable years, do not include the gain in the current year income.

Line 2 – Net gain or (loss) shown on California Schedule(s) K‑1 (100S, 541, 565, and 568)

Combine gain(s) and loss(es) from all California Schedule(s) K-1 (100S, 541, 565, and 568), Share of Income, Deductions, Credits, etc. Get California Schedule K-1 (100S, 541, 565, and 568) instructions for more information on capital gains and losses. Enter the net loss on line 2, column (d), or the net gain on line 2, column (e).

Line 3 – Capital gain distributions

If you receive federal Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains, from a mutual fund, do not include the undistributed capital gain dividends on Schedule D (540). If you receive federal Form 1099‑DIV, Dividends and Distributions, enter the amount of distributed capital gain dividends.

Line 6 – California capital loss carryover from 2022

If you were a resident of California for all prior years, enter your California capital loss carryover from 2022. However, if you were a nonresident of California during any taxable year that generated a portion of your 2022 capital loss carryover, recalculate your 2022 capital loss carryover as if you resided in California for all prior years. Get FTB Pub. 1100, Taxation of Nonresidents and Individuals Who Change Residency, for more information. Enter your California capital loss carryover amount from 2022 on line 6.

Line 8 – Net gain or (loss)

If the amount on line 4 is more than the amount on line 7, subtract line 7 from line 4. Enter the difference as a gain on line 8.

If the amount on line 7 is more than the amount on line 4, subtract line 4 from line 7 and enter the difference as a negative number on line 8.

Use the worksheet at the end of these instructions to figure your capital loss carryover to 2024.

Line 9

If line 8 is a net capital loss, enter the smaller of the loss on line 8 or $3,000 ($1,500 if you are married or an RDP filing a separate return).

Line 12a

Compare the amounts entered on line 10 and line 11 to figure the adjustment to enter on Schedule CA (540), Part I, Section A, line 7, column B.

For example:

Loss on line 10 is less than loss on line 11.

  • Federal loss on line 10 is: ($1,000)
  • California loss on line 11 is: ($2,000)
  • Difference between line 10 and line 11: $1,000

Gain on line 10 and loss on line 11.

  • Federal gain on line 10 is: $3,000
  • California loss on line 11 is: ($3,000)
  • Difference between line 10 and line 11: $6,000

Line 12b

Compare the amounts on line 10 and line 11 to figure the adjustment to enter on Schedule CA (540), Part I, Section A, line 7, column C.

For example:

Loss on line 10 is more than loss on line 11.

  • Federal loss on line 10 is: ($2,000)
  • California loss on line 11 is: ($1,000)
  • Difference between line 11 and line 10: $1,000

Loss on line 10 and gain on line 11.

  • Federal loss on line 10 is: ($2,000)
  • California gain on line 11 is: $5,000
  • Difference between line 10 and line 11: $7,000

California Capital Loss Carryover Worksheet

  1. Enter loss from Schedule D (540), line 11, as a positive number.
  2. Enter amount from Form 540, line 17.
  3. Enter amount from Form 540, line 18.
  4. Subtract line 3 from line 2. If less than zero, enter as a negative number.
  5. Combine line 1 and line 4. If less than zero, enter -0-
  6. Enter loss from Schedule D (540), line 8, as a positive number.
  7. Enter the smaller of line 1 or line 5.
  8. Subtract line 7 from line 6. This is your capital loss carryover to 2024.

Franchise Tax Board Privacy Notice on Collection

Our privacy notice can be found in annual tax booklets or online. Go to ftb.ca.gov/privacy to learn about our privacy policy statement, or go to ftb.ca.gov/forms and search for 1131 to locate FTB 1131 EN-SP, Franchise Tax Board Privacy Notice on Collection – Aviso de Privacidad del Franchise Tax Board sobre la Recaudación. To request this notice by mail, call 800-338-0505 and enter form code 948 when instructed.