The adjusted basis of an investment property is the basis after subtracting expenses and adding improvement-related costs. Form 8824 is used to file like-kind exchanges. The basis is a requirement for form 8824. The basis of an investment property is a little different than the basis used for properties in a 1031 exchange. In this article, we’ll look at what a basis means for form 8824.
Part III of Form 8824 is where we first encounter the adjusted basis. Part III is titled Realized Gain or (Loss), Recognized Gain, and Basis of Like-Kind Property Received.
Line 13 is the first adjusted basis-related entry. However, lines 12-14 are for property that is not of a like-kind. This might be property traded with a like-kind exchange but doesn’t qualify as like-kind property. Property that doesn’t qualify as like-kind includes:
Because properties often do not equal in value, non like-kind properties may be used to offset the difference. This property is called boot. Any boot is subtracted from the basis.
Moving further down but still in Part III are lines 18 and 25.
Line 18 is the Adjusted basis of the property given up. This is also called relinquished property. Line 25 is the basis for new or replacement property. Let’s use an example to better understand where values from a 1031 exchange fit into this form.
Relinquished property:
Fair market value (FMV): $500,000
Adjusted basis: $375,000 ($90,000 allocated to land)
Replacement property:
FMV: $800,000
The investor adds $345,000 to cover the selling cost of $45,000 plus the $300,000 difference in the FMV ($800,000 - $500,000).
The $345,000 is called the additional basis. The $375,000 is called a carryover basis. Together these values create the new basis of $720,000.
$800,000 - $720,000 = $80,000 gain. This is the amount that can be deferred in the 1031 exchange. The new basis of $720,000 goes on line 25.
The basis is the same in the relinquished and replacement properties. The IRS states that “this transfer of basis from the relinquished to the replacement property preserves the deferred gain for later recognition.”
Part IV of the form is called Deferral of Gain From Section 1043 Conflict-of-Interest Sales. Two lines in this section involve the basis:
Line 31 - Basis of divested property
Line 38 - Basis of the replacement property. Subtract line 37 from line 33
Line 31 is the basis of the relinquished property or $720,000. Line 37 is the deferred gain, while 33 is the cost of replacement property purchased within 60 days after the date of sale.
The adjusted basis factors in expenses and improvements. Expenses that do not improve a property adjust the basis down. These include depreciation and insurance. Costs that are used to improve the property adjust the basis up.
In Form 8824, the adjusted basis in the new property is calculated by using the relinquished property’s adjusted basis and adding any boot the investor brings to the exchange.