Many investors recognize the appeal of 1031 exchanges when it comes to tax-deferral and wealth management, but it’s important to note that they do come with strict reporting requirements. One of the primary IRS forms to consider is Form 8824, which is also called the like-kind exchanges form.
As you commit to a 1031 exchange, understanding the purpose of this form becomes crucial to help you determine which information is needed and how you can stay compliant. Below, Realized 1031 shares everything you need to know.
IRS Form 8824 Explained
Form 8824 is the primary document used for reporting like-kind exchanges. If you sell a property and reinvest the proceeds to acquire a like-kind asset under the 1031 exchange framework, then you’re required to fill out and submit this form during that tax year in which the exchange occurred.
The form is applicable in these exchange variations.
- Simultaneous
- Delayed (traditional exchange)
- Reverse
- Build-to-suit (improvement exchange)
The 1031 exchange does delay capital gains tax payments, but it doesn’t delay reporting. Accurate and prompt filing of Form 8824 helps the IRS confirm that the transaction meets the requirements for tax deferral.
Primary Use of Form 8824
With Form 8824, you have solid documentation that substantiates the 1031 exchange. The form allows the IRS to verify that both properties are like-kind. Plus, the form shows proof that you followed other requirements, such as the 45-day identification period and 180-day timeline.
Beyond compliance, the form provides ways to track deferred capital gains and depreciation recapture. This information helps with future exchanges or when a taxable event occurs. In summary, the form serves as the paper trail that details compliance with IRS rules and the value of deferred gains.
1031 Exchange Tax Reporting: What Information Is Required?
We can categorize the information you need to supply into three broad groups.
Property Details
These include the descriptions of both relinquished and replacement assets. You’ll also need to include the dates the properties were transferred and acquired. The information helps establish that the transaction qualifies as a valid exchange rather than a taxable, traditional sale.
Exchange Timeline
The form asks for key dates.
- The date the relinquished property was sold
- The date the replacement property was received
The information confirms whether or not the exchange followed IRS timelines.
Financial Breakdown
You’ll need to supply details such as the fair market value of the properties, exchange expenses, and any cash you received. This section determines whether the exchange is fully deferred or only partially.
Reporting Boot on Form 8824
What if there is non-like-kind property you received? This is considered boot and is taxable, turning the transaction into only a partially deferred exchange. Form 8824 calculates this taxable amount and carries it through to your tax return. It’s not only cash, as debt reduction and personal property for older exchanges (before the Tax Cuts and Jobs Act of 2017) are also included. Failing to account for boot may result in penalties or trigger audits.
Tracking Deferred Gains and Basis
Form 8824 has another critical purpose: tracking the deferred gains and basis of the relinquished property. This process becomes even more complex as you enter new exchange cycles, underscoring the importance of the form. With this form, the IRS has a record of how much gain you deferred and how the value should be treated in future transactions, including the eventual taxable event.
How To File Form 8824
According to IRS 8824 instructions, taxpayers must file the form along with their federal tax return within the year the 1031 exchange occurred and not as a standalone document.
- Individual Taxpayers: Attach with Form 1040
- Partnerships: Attach with Form 1065
- Corporations: Attach with Form 1120
As mentioned above, the form must include accurate information regarding the exchanged properties, dates, and financial breakdown. Plus, you must include any boot received. For these partially deferred exchanges, the resulting gain is carried over to other schedules, such as Schedule D or Form 4797.
Due to the complexity of filing, always do it with your tax professional. This best practice helps avoid errors and preserves the eligibility of the exchange.
Wrapping Up: Form 8824 1031 Exchanges
In 1031 exchanges, Form 8824 is the primary document that records details of the transaction and serves as a monitoring tool for both investors and the IRS. When you properly and accurately complete it, the form protects your deferred capital gains, reduces audit risk, and creates a clear record for future exchanges or tax liability.
Sources:
https://www.investopedia.com/taxes/trumps-tax-reform-plan-explained/
https://www.investopedia.com/financial-edge/0110/10-things-to-know-about-1031-exchanges.aspx
https://www.irs.gov/forms-pubs/about-form-8824
