IRS Form 8824 is used to report a 1031 exchange for the tax year in which you complete it. Execution of the form calculates the amount of gain deferred due to a like-kind exchange of property. The IRS considers the deal completed in the tax year that you sell the initial relinquished property, and the exchange period begins. If the replacement process is not fully consummated until the following tax year, then the Form 8824 will not be final until that process is complete, which may require leeway in tax reporting deadlines. If you do not finalize the replacement purchase or purchases until the next tax year, you will need to request an extension for tax filing due to that circumstance.
Form 8824 has four parts. Part I is for providing information on the Like-Kind Exchange. The IRS has been flexible with the acceptance of like-kind submissions, allowing investors to substitute different property types, different grades, alternate locations, and even swap physical assets for investments in replacement property interests. The required information in Part I includes the descriptions of the relinquished and replacement properties, the relevant dates of identification and settlements, and a question about whether the exchange involved a related party.
Part II addresses related parties. You must complete this section if a related party is involved in any of the transactions in the exchange, or the 1031 Exchange deferral will not be valid. A related party includes the taxpayer's spouse, parent, child, grandchild, grandparent, sibling, or a corporation or trust of any type in which the taxpayer has direct family ownership of over fifty percent. It may be helpful to note that a person related by marriage is not considered a related party. If the exchange involves related parties, one of these exceptions must be applicable for the exchange to be valid:
- The disposition of the property took place after the death of one of the parties.
- The disposition was an involuntary conversion, and the parties learned of the conversion or threat of it after they initiated the transaction.
- Neither the exchange nor the disposition had as a primary motivation the avoidance of capital gains tax. This exception requires an explanation to be submitted for consideration and approval by the IRS.
Related party exchanges can be tricky and generally warrant discussion with your tax advisor. If you do not have to can satisfy the Part II exceptions, since there is no related party involvement, or you adequately support the involvement with the description of the exception, then you can move to Part III. In that case, Part III is the repository for the realized gains, recognized gains, and the basis of like-kind property received in the exchange. If debt acquired in the replacement property is less than debt released by selling the relinquished property, the difference (boot) becomes recognized gain. Any cash received above cash spent is also recognized gain. Either one becomes taxable income.
Part IV is only for use by specific members of the federal government's executive and judicial branches in reporting deferred gain on sales of properties held in trust for conflict-of-interest purposes. It is not relevant for most taxpayers.
If you made more than one 1031 exchange during the tax year, you may file a single Form 8824 with your tax return. With the form, you will attach a statement that includes all the pertinent information for each applicable exchange. The IRS guidance for multiple exchanges says to treat Form 8824 as a summary, and to enter your name and taxpayer identification number on the form, along with the total recognized gain on line 23 and the total basis of all like-kind property on line 25. The details will be on the attached summary statement, not on the form itself.
The 1031 Investor's Guidebook
Tackle the art and science of completing your 1031 exchange.