As you likely already know, investing in 1031 exchanges brings benefits like tax deferral and enhanced diversification, but the IRS imposes strict rules and reporting processes for those who undergo this transaction. One critical document that you must accurately fill out is Form 8824, which is also called the Like-Kind Exchanges form.
This document can be complex to complete, and yes, there are various errors or inaccurate tax filings that you can unknowingly commit. To help you avoid these IRS Form 8824 pitfalls, Realized 1031 is here with our insights and best practices. Keep reading to learn more!
Form 8824 Common Mistakes
Many Form 8824 errors stem from a misunderstanding of how the 1031 exchange framework translates to tax filings, resulting in inconsistent documentation, incorrect assumptions for timelines, and overlooked taxable elements.
Incorrect Identification of Relinquished or Replacement Assets
There may be errors with addresses, property descriptions, or closing dates. These inconsistencies can conflict with settlement statements and heighten IRS scrutiny.
Errors in Exchange Timelines
Misstated identification periods or exchange completion timelines, which should be within 45 and 180 days, respectively, can result in conflicting records.
Overlooked or Misreported Boot
Some investors may fail to report any non-like-kind property they receive, such as cash or mortgage relief. These should be reported accurately, as these are taxable.
Incorrect Basis and Gains Calculations
Another common mistake is miscalculating the basis of either properties or the gains that would ultimately be deferred. Some investors may overlook depreciation deductions, or they might improperly allocate transaction costs. Beyond issues with the tax filing, these miscalculations may make it difficult to track gains for future 1031 exchanges.
Related-Party and Intermediary Reporting Issues
Some 1031 exchange investors may omit required disclosures for related-party exchanges. Others may fail to properly reference the qualified intermediary. Both of these lead to non-compliance and endanger the transaction's eligibility.
Consequences of 1031 Exchange Reporting Mistakes
Committing errors, whether intentionally or not, may lead to unwanted consequences. Beyond simple corrections, these mistakes could result in a partially deferred exchange or even a full disqualification. The IRS may conduct an investigation and, if they determine that the inaccuracies indicate noncompliance, the deferred gains become immediately taxable.
The investigation could even escalate to an even bigger audit or additional documentation. This may result in more paperwork and expenses. You’ll lose time and money correcting the issues. Plus, you could face penalties or interest, further compounding the financial impact.
In summary, here are some of the possible consequences for Form 8824 inaccuracies.
- Loss of tax-deferred treatment
- Immediate capital gains tax liability
- Accuracy-related penalties
- Increased audit risk
- Delays in future tax planning strategies
Form 8824 Filing Tips for Accuracy and Compliance
The form is like a summary of all the elements of the 1031 Exchange, and small oversights can quickly turn into costly reporting issues. Taking a methodical, documentation-driven approach significantly lowers the chances of costly reporting mistakes. Here are some best practices you can follow.
- Cross-check Dates and Property Details: Investors should ensure that transfer dates, identification dates, and property descriptions match the closing statements and exchange documents.
- Document and Report Boot Clearly: These include leftover cash, mortgage relief, and other non-like-kind property you received after the exchange.
- Check Adjusted Basis and Depreciation Figures: Use prior depreciation schedules and acquisition records to accurately calculate gains.
- Engage With Your Qualified Intermediary: The intermediary handles the statements that confirm exchange structures, timelines, and fund flows.
- Work Closely With Your Accountant: In reality, it’s your tax professional or CPA who will handle the heavy lifting of filing Form 8824. They’re the ones filling out the details, while your task is to provide the source documents and confirm the information. Working closely with them helps you verify the details and spot errors before they become costly issues.
Wrapping Up: Common Errors on Form 8824 and How To Avoid Them
Form 8824 is notoriously technical, and errors can be introduced in gains, property descriptions, exchange timelines, and various other aspects of the 1031 exchange. These miscalculations and inaccuracies can lead to impactful consequences. The entire exchange might fall through, resulting in a significant tax hit and wasted resources.
As such, staying engaged with your intermediary and tax professionals, taking a documentation-driven approach, and careful preparation and filing are critical to limit these errors and maintain IRS compliance. Comprehensive planning and professional guidance remain your most effective safeguards when completing Form 8824.
Sources:
https://nstp.org/memberarea/federaltaxalert/2023/what-is-boot-in-a-1031-exchange
https://www.investopedia.com/financial-edge/0110/10-things-to-know-about-1031-exchanges.aspx
https://www.irs.gov/forms-pubs/about-form-8824
