What Schedule D (565) Is For
California Schedule D (565) reports a partnership’s capital gains and losses for the 2022 tax year. It accompanies Form 565 and captures sales or exchanges of capital assets such as stocks, bonds, partnership interests, and investment real estate. Unlike Schedule D-1, which handles business property, Schedule D focuses solely on capital assets held either short term (one year or less) or long term (more than one year).
Partnerships themselves generally do not pay income tax on these gains. Instead, results flow through to the partners on Schedule K-1 (565). California requires separate tracking of transactions to ensure accurate sourcing, proper character of income, and correct basis reporting, especially for partnerships with both resident and nonresident partners.
When You’d Use Schedule D (565)
Partnerships file Schedule D (565) whenever they have capital asset transactions during the tax year. This includes routine sales, redemptions, distributions from mutual funds, or capital gains passed through from other entities. If the partnership has no capital transactions, it does not file Schedule D.
You would also use Schedule D (565) for late or amended filings. A 2022 return was due March 15, 2023, or October 16, 2023 with a valid extension. If errors are discovered—such as incorrect basis, missing sales, or misclassified holding periods—the partnership must file an amended Form 565 with a corrected Schedule D and issue amended K-1s.
Key Rules or Details for 2022
California follows several federal rules for capital assets but departs from them in areas that affect reporting and basis.
Holding Period and Character
Short-term and long-term gains are determined using federal rules. While federal law may apply lower rates to long-term gains, California treats all capital gains as ordinary income. Character still matters for netting rules and how items pass through to partners.
Source Rules for Nonresident Partners
Nonresidents can only use California-source capital losses against California-source capital gains. Gains from assets not located, used, or managed in California are not California-source for nonresident partners. Partnerships must source each transaction correctly on K-1s.
Conformity Limits
California conforms to the Internal Revenue Code only through January 1, 2015. Post-2015 federal changes—such as certain depreciation, bonus rules, and Opportunity Zone deferrals—do not apply. Partnerships must reverse any federal deferrals or exclusions and adjust basis for California purposes.
Installment Sales and Pass-Through Items
Installment sale gains are reported using Form FTB 3805E. Capital gains received from other pass-through entities (e.g., LLCs or S corporations) must be added to Schedule D totals and shown on Schedule K.
Step-by-Step (High Level)
Step 1: Start with Federal Figures
Complete federal Form 1065 and federal Schedule D. California uses these as the foundation but requires adjustments for nonconforming rules and California-specific basis.
Step 2: Separate Short-Term and Long-Term Items
List each short-term sale in Part I and each long-term sale in Part II. Include the description, acquisition date, sales date, sales price, basis, and resulting gain or loss. Use continuation sheets if needed.
Step 3: Report Installment Sale Gains
Enter short-term installment gains from Form FTB 3805E in Part I and long-term installment gains in Part II. Attach the form to support these amounts.
Step 4: Add Pass-Through Capital Gains
Include the partnership’s share of capital gains from other partnerships, LLCs, S corporations, or fiduciaries. These amounts will later flow to Schedule K lines 8 and 9.
Step 5: Include Capital Gain Distributions
If the partnership received long-term capital gain distributions from mutual funds or regulated investment companies, report them in Part II.
Step 6: Total Net Gains and Attach Documentation
Compute net short-term and long-term results. Attach supporting statements showing how basis was determined for California, especially where federal and state rules differ.
Step 7: Issue Schedule K-1 (565)
Provide each partner with their share of short-term and long-term capital gains or losses. Exclude any items specially allocated under the partnership agreement; those are reported directly on the K-1.
Common Mistakes and How to Avoid Them
- Reporting business property on Schedule D (565)
Use Schedule D-1 for Section 1231 or business property. - Ignoring California basis differences
Recalculate basis for depreciation and Section 179 given California’s limited conformity. - Including specially allocated items
Only proportionate gains/losses go on Schedule D; specially allocated amounts go directly on K-1s. - Incorrect sourcing for nonresident partners
Ensure California-source rules are applied to each transaction. - Forgetting installment sale reporting
Attach Form FTB 3805E and enter the correct short-term or long-term amounts. - Late filing without an extension
Missing the deadline can trigger penalties of $18 per partner per month.
What Happens After You File
The Franchise Tax Board (FTB) reviews the return and matches capital gain amounts to partner K-1s. E-filers typically receive confirmation within a few days, while paper returns take several weeks. The FTB may issue a notice for mismatches, missing basis adjustments, late payment of the $800 annual tax, or errors involving specially allocated items.
If the FTB proposes changes, the partnership can protest within 60 days. Unresolved disputes may be appealed to the Office of Tax Appeals or superior court. Partnerships and partners have four years from the original or extended due date to amend returns or claim refunds. Retain all brokerage statements and basis worksheets for at least four years.
FAQs
What if the partnership had no capital transactions for 2022?
You do not need to attach Schedule D (565) if there were no capital asset sales or exchanges. Enter zero on Schedule K lines 8 and 9 as needed.
Can we net short-term and long-term gains and losses?
Yes. Schedule D computes net short-term and long-term amounts separately, and those totals flow to Schedule K. Partners then report their share on their individual income tax returns.
How are capital assets distributed to partners reported?
Distributions of capital assets are not reported on Schedule D. Instead, use Form FTB 3837 to adjust the partner’s basis. The partner generally takes the asset with a carryover basis.
Does California allow federal Opportunity Zone deferrals?
No. California does not conform to federal Opportunity Zone rules. Report the full gain on Schedule D as if no deferral applied, and partners must reverse any federal benefits on their California returns.
How do nonresident partners handle capital gains on assets outside California?
Nonresidents only report California-source capital gains. If the asset was not located, used, or managed in California, the gain is not California-source and should be excluded from that partner’s Schedule K-1.
For official instructions, visit the California FTB's Schedule D (565) page at: https://www.ftb.ca.gov/forms/2022/565.html.
