A 1031 exchange is a complex process. There are many rules to follow so that the exchange isn’t invalidated. Additionally, specific forms, such as form 8824, must be filed. The frequency and timing of filing for this form can vary depending on the taxpayer’s specific situation. In this article, we’ll look at form 8824 in more detail and discuss its filing requirements.
IRS Form 8824 is used to report the details of a 1031 exchange, also called a like-kind exchange. Gains on the relinquished property and the cost basis of the replacement property are reported on this form. Gains on the relinquished property are, of course, deferred. Any taxable gain for the year is also reported.
Taxes aren’t eliminated in a like-kind exchange. They are pushed out into the future and only realized when the property is sold. As long as the investor holds the replacement property, gains are not realized.
An investor can use the like-kind exchange again with the replacement property. This continues to defer gains.
There are four parts to Form 8824:
If the 1031 exchange was started and completed within the same calendar, Form 8824 is filed with your regular tax return. A tax return extension is often needed if the exchange is started in one year and completed in the following year. This requires IRS Form 4868.
Related parties can play a role in the frequency of Form 8824 filings. A related party is the taxpayer’s spouse, child, parent, grandparent, or sibling. A trust or corporation where the taxpayer owns more than 50% is also considered a related party.
If a related party exchange occurred, filing might be required two years after the exchange has been completed. Again, you’ll want to check with your tax professional for any additional filings.
Form 8824 is filed with your regular annual income tax return. It only needs to be filed once. However, the timing of the filing can vary depending if the exchange was completed within the same calendar year or wrapped around into the following year.
An exchange between related parties can also affect when or if Form 8824 needs to be filed. Additional filings can also be required two years after a related party exchange.
Because of the complexities involved in a 1031 exchange and specific tax filer scenarios, it is best to work with a tax professional when filling out and filing Form 8824.