How to Report a 1031 Exchange on Form 8824

Every 1031 exchange is reported to the IRS on Form 8824, Like-Kind Exchanges. Your CPA prepares it, but knowing what goes on the form, and which records it requires, makes tax season faster and helps you catch problems before they cost you. This guide walks through the form section by section, with a worked example.

Who files Form 8824, and when

• Every exchange is reported. If you transferred property in a like-kind exchange during the tax year, you file Form 8824 with your return for that year. This is the year you sold your relinquished property, even if you received the replacement property the following year.
• One form per exchange. If you completed more than one exchange, you generally file a separate form for each, or a summary form with an attached statement showing each exchange.
• Related party exchanges are reported for three years. If the exchange involved a related party, you also file Form 8824 for each of the two years after the exchange.

The form has four parts. Parts I through III cover like-kind exchanges. Part IV applies only to certain sales by federal officials under conflict-of-interest rules, so most investors leave it blank.

Part I: Information about the exchange

Part I asks for the basic facts:

• Lines 1 and 2: a description of the property you gave up and the property you received.
• Line 3: the date you originally acquired the property you gave up.
• Line 4: the date you transferred it (your sale closing date).
• Line 5: the date you identified the replacement property in writing. This is the date on your 45-day identification form.
• Line 6: the date you received the replacement property.
• Line 7: whether the exchange involved a related party.

Lines 4, 5 and 6 are where the IRS can see whether you met the 45-day and 180-day deadlines, so the dates must match your closing statements and identification letter.

Part II: Related party exchanges

Complete Part II only if you answered yes on line 7. It asks for the related party's name, address and relationship, and whether either of you disposed of the property in the year of the exchange or later. If a disposition happened within two years and no exception applies, the deferred gain becomes taxable. See our guide to related party exchanges.

Part III: Gain, tax and new basis

Part III does the math. It works out three numbers: your total gain (realized gain), the part you pay tax on now (recognized gain), and your basis in the new property.

• Lines 12 to 14: used only if you also gave up property that wasn't like-kind, such as equipment, in the exchange. Cash you paid goes on line 18 instead.
• Line 15: cash and other non-like-kind property you received, plus any net debt you were relieved of, reduced by exchange expenses such as closing costs and intermediary fees.
• Line 16: the fair market value of the like-kind property you received.
• Line 18: your adjusted basis in the property you gave up, plus net amounts you paid and any exchange expenses not used on line 15.
• Line 19: realized gain, your total gain on the exchange.
• Lines 20 to 22: how much of that gain is taxable, split between ordinary income under the depreciation recapture rules (line 21, carried to Form 4797) and the rest (line 22, carried to Schedule D or Form 4797).
• Line 23: recognized gain, the amount taxed this year.
• Line 24: deferred gain, the amount carried forward into the new property.
• Line 25: the basis of the property you received, which your CPA uses for future depreciation and any future sale.

A worked example

You sell a rental property for $1,000,000. Your adjusted basis after depreciation is $400,000, and you pay $20,000 in closing costs and intermediary fees out of pocket. You buy a replacement property for $950,000 and receive $50,000 in cash at the end of the exchange. There is no debt on either property.

The $50,000 you kept is reduced by your $20,000 of exchange expenses, so $30,000 is taxed now and $550,000 is deferred. Your new property's basis is $400,000, which is its $950,000 value minus the $550,000 deferred gain. Had you reinvested the full proceeds, no gain would be taxed this year. This example is simplified; how the recognized gain splits between depreciation recapture and capital gain depends on your property's history.

Records your CPA will need

• The closing statements for both the sale and the purchase.
• Your exchange agreement and the assignment documents.
• Your signed 45-day identification notice.
• The intermediary's final accounting, showing every deposit, disbursement and fee in your exchange account.
• Your depreciation records for the property you sold.

At the end of every exchange, Precision Exchange, Inc. sends you and your CPA a complete final accounting, so everything needed for Form 8824 is in one place.

Depreciation after the exchange

The basis carried over from your old property generally continues to be depreciated on its existing schedule, while any additional basis, for example from adding cash or debt, is depreciated as newly acquired property. Alternatively, you can elect to treat the entire basis as newly placed in service. Your CPA will set this up when preparing the return for the year of the exchange.

Don't forget your state

Most states follow the federal rules, but some require their own reporting. California, for example, requires an annual information return (Form FTB 3840) when California property is exchanged for property outside the state, so it can tax the deferred gain when the replacement property is eventually sold. See our guide to state clawback rules.

This article is a guide to the form, not tax advice. Your CPA will prepare Form 8824 based on your full tax picture. If you'd like us to send your exchange records directly to your CPA, just ask.