The 26 U.S. Code § 1031—”Exchange of Real Property Held for Productive Use or Investment”—can help defer any potential taxes levied on gains resulting from the sale of investment real estate. Swapping your relinquished property for a replacement property of equal or greater value can push your tax burden down the road at least, as long as you follow the IRS’ many rules regarding the like-kind exchange.
One of those rules involves completing and filing out Form 8824. This form tells the IRS that you completed a like-kind exchange, requiring descriptions of relinquished and replacement properties, adjusted basis of the properties, dates, locations, and any relationships between the parties involved with the exchange.
But is it absolutely essential to fill out and file this form?
According to a 2007 report issued by U.S. Department of the Treasury, Section 1031 doesn’t specifically call for a Form 8824 filing. The report indicated that the Section 1031 language doesn’t call for a requirement to file a Form 8824, and that taxpayers won’t be penalized for failure to do so.
You might now be giving a great sigh of relief. Form 8824 can be tricky to fill out, as it requires a great deal of calculation and information. The problem can escalate if the replacement process of your 1031 exchange isn’t completed until the next tax year. In that situation, Form 8824 won’t be finalized (and you’d need to request a tax filing extension for that purpose).
But don’t get too comfortable. While the Treasury Department is more laid back on the requirement to file the form, the IRS is adamant that it’s absolutely necessary. If you Google the term “1031 reporting requirements,” most of the top-page hits—including the IRS.gov page—insist that you have to report any like-kind exchange on Form 8824.
Even though the 2007 Treasury report states that filing the form isn’t essential, it does suggest that if 8824 isn’t filed for an unreported or disclosed partially taxable exchange, you could receive a penalty, thanks to 26 U.S. Code § 6662—"Imposition of Accuracy-Related Penalty on Underpayments.”
You also might not be able to defer your capital gains. A lack of Form 8824 means the IRS can’t determine if your like-kind exchange follows the specific regulations. As an added issue, your deprecation recapture might also not be deferred. In fact, failure to file Form 8824 might treat your like-kind exchange as a sales transaction subject to all kinds of taxes.
So, in answer to what happens if you don’t file Form 8824, the answer could be “nothing.” Or it could be non-recognition of your 1031 exchange, complete with expensive consequences. As such, be sure to work with your tax professional on getting the right information onto Form 8824—and then filing it with your tax return.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
Costs associated with a 1031 transaction may impact investor's returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities.
