At the end of a 1031 exchange process, the Internal Revenue Service (IRS) expects to hear from you. The taxes you don’t pay on the sale are rolled forward into the new property. The IRS wants to know about that via Form 8824.
We’ll explain what this form is, how it works, and how it should be filled out here.
What Is a 1031 Exchange?
A 1031 exchange is a transaction involving the sale of one investment property and the purchase of another with the proceeds.
These transactions are complex, and they involve several moving parts. For example, you’re required to hire a qualified intermediary to hold the funds between the sale of one property and the purchase of another. If you accept the funds at any point, the transaction becomes subject to tax.
As we mentioned, the tax obligations are delayed (not forgiven) in a 1031 exchange. Investors are required to track their basis in the new property, and if they sell it, the delayed taxes may come due.
Since the tax obligations linger, investors are required to keep the IRS informed via forms. Consider this a critical part of completing your exchange legally.
Who Must Fill Out a 1031 Exchange Form?
As the IRS explains, anyone who buys a property via a 1031 exchange must report the transaction via Form 8824. It must be filed for the year in which the exchange took place.
Your qualified intermediary typically doesn’t fill out this important document for you. However, this professional can provide the data you need to fill all of the required lines within this document. For example, your professional could confirm the dates of transactions, offer specific data about property values, and more.
Investors may use accountants or other financial experts to help with the form. However, you can follow a few simple instructions and tackle this document independently.
Guide to the 1031 Exchange Form
To report your 1031 exchange legally, you must use Form 8824. The form has the following four sections. Here’s what you need to know about each one.
Section 1: Information About the Exchange
In this section, you’ll provide the IRS with detailed information about the properties you sold and purchased. You must offer the following dates:
When the sold property was originally acquired
When that property was sold
When you provided written documents about the property you wanted to buy
When that sale was completed
The IRS wants these dates for a very specific reason. To ensure you’re not required to pay taxes, you must identify a replacement property within 45 days of the sale and complete the transaction within 180 days. If your dates don’t align, the transaction is subject to tax.
At the end of this section, you must answer a question about the other parties in the exchange. If you worked with someone related to you, the next section of the form is required. If not, you can skip it.
Section 2: Related Parties
In this section, you’ll provide information about the related party that either sold you the property or purchased one of yours. Be prepared to answer questions about other exchanges that happened in the last two years.
Typically, you’re not allowed to perform like-kind exchanges with relatives and other family members. However, some exceptions exist. At the end of this section, you’ll be asked about those exceptions (such as the death of one party or an involuntary transaction).
Section 3: Gains & Losses
In this section of the form, you’ll face a series of questions involving math.
Questions 12 through 14 should only be completed if other assets (like money or artwork) that don’t qualify as like-kind properties were part of the exchange. If you did a straight switch with like-kind properties, these lines aren’t required.
Questions 13 and 14 involve the adjusted basis of the property you sold and the gain or loss of that property. You may need an accountant’s help to get these figures, as they aren’t the same as the sale price.
Questions 15 through 17 involve the value of the property you purchased, along with any cash you got in the transaction. If you didn’t accept cash in the purchase, this section is a little easier.
Question 18 involves the adjusted basis of your sold property, net amounts paid, and exchange expenses that you didn’t include in line 15.
The rest of this section involves doing math with the amounts you entered. Check your calculations carefully.
Section 4: Deferral of Gain
Very few people are required to fill out this section. In fact, it’s made only for people who are members of the federal government and who bought a property worth more than the basis in the sold property. If you fit into this category, prepare for questions about the property sold, the property purchased, and the dates everything happened.
How to File This Form
The IRS requires investors to fill out this form and file it during the tax season in which the transaction happened. It can be included as an attachment to the other official forms you file with the government in that year.
Get Expert Help with Your Exchange
Filling out paperwork is just one part of your 1031 exchange. You must also actually complete these transactions on time and without mistakes. It’s critical to work with a company with plenty of experience.
1031 Pros is exactly what you need. We’ve helped investors both large and small with complex transactions involving commercial real estate. Contact us to find out more.
References
Like-Kind Exchanges Under IRC Section 1031. (February 2008). Internal Revenue Service.
Form 8824: Like-Kind Exchanges. (2023). Internal Revenue Service.
Instructions for Form 8824. (2023). Internal Revenue Service.
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