How to Report a Reverse 1031 Exchange on a Tax Return

Reporting a reverse 1031 exchange on your tax return doesn’t require too much work above a regular 1031 exchange. However, if you have done more than one reverse 1031 exchange, you’ll need to file forms for each one, which can certainly add to your workload at tax time. 

In this article, we’ll explore the details of what you must file with your tax returns for a reverse 1031 exchange.

Reverse 1031 Exchange Summary

This section is a quick overview of how a reverse 1031 exchange works. Basically, the replacement property is acquired before the relinquished property is sold. The reverse exchange follows the same timelines as a regular exchange.

Reverse 1031 Exchange Tax Forms

A reverse 1031 exchange only requires one tax form - Form 8824. This is also the same tax form used in a regular 1031 exchange.

Form 8824 is titled Like-Kind Exchanges and has four sections:

• Part I - Information on the Like-Kind Exchange: This section requires a description of both properties, the date the replacement property was identified, and transaction (i.e., buy and sell) dates for both properties.
• Part II - Related Party Exchange Information: This section is needed only if a related party is involved in the exchange. A related party is a spouse, ancestor, or lineal descendant. It can also be a person who owns more than 50% of an entity involved in the exchange.
• Part III - Realized Gain or (Loss), Recognized Gain, and Basis of Like-Kind Property Received: This section requires some calculations and determines the gain or loss on the exchange. The fair market value, adjusted basis, and cash received for the relinquished property are required.
• Part IV - Deferral of Gain From Section 1043 Conflict-of-Interest Sales: This section is only needed by those who are officers or employees of the federal government's executive branch or judicial officers of the federal government. It is used to identify any conflicts of interest.

If you used a qualified intermediary, as checked off for question 7 in Part I, you must answer question 9 in Part II.

Form 8824 is included with the tax filer's income tax forms, but only if the 1031 exchange was completed. The correct tax year for reporting is determined by the settlement of the relinquished property and the start of the 180-day exchange period.

A 1031 exchange can be a complex process. Working with a real estate tax specialist and a qualified intermediary can help ensure that your reverse 1031 exchange goes smoothly.