IRS Form 8824 is a form submitted to the IRS when a like-kind exchange takes place in real estate investing. A like-kind exchange, also referred to as a 1031 exchange, is when an investor exchanges one investment property for another similar property, potentially deferring capital gains taxes under section 1031 of the IRS code.
The form is used to calculate the gain or loss on the exchange and report any deferred gain.
To qualify for tax deferral under section 1031 of the IRS code, the properties involved must be of like-kind. The property cannot be held primarily to sell, and must be held for productive use in a trade or business for investment purposes.
Like-kind doesn’t refer to the type property, but instead to properties held for productive use in a trade or business for investment purposes. A wide range of properties can qualify for a like-kind exchange. For example, relinquishing an apartment building for a shopping center, exchanging vacant land for rental property, or a warehouse for an office building.
Form 8824 asks for details about the properties involved in the exchange, including a description, date of the sale and acquisition, fair market values, among others. The form has calculations for the realized gain or loss, recognized gain, and the deferred gain. The recognized gain is the amount of gain that is taxable in the current tax year, and the deferred gain is the gain that is postponed or rolled over into the replacement property.
It is important to note that a like-kind, or 1031 exchange, delays capital gains taxes, but doesn’t eliminate them. If a property is sold without completing another exchange, the deferred taxes and any depreciation, will be realized.
To report a like-kind exchange accurately, and to claim the potential tax deferral benefits allowed under Section 1031, a form 8824 is required. A tax professional or referrer can offer guidance when completing this form, as the tax rules can be complex and subject to change.