How to File Form 8824 for a 1031 Like-Kind Exchange

A like-kind exchange, governed by Section 1031 of the Internal Revenue Code, allows a taxpayer to postpone paying capital gains tax on the sale of a business or investment property by reinvesting the proceeds into a new, similar property. The transaction is officially reported to the Internal Revenue Service (IRS) on Form 8824, Like-Kind Exchanges. This form is the mechanism through which the IRS tracks the deferred gain and ensures compliance with the exchange rules.

The primary function of Form 8824 is to calculate the amount of gain that can be deferred and to establish the cost basis of the newly acquired property. This process does not eliminate the tax liability indefinitely; rather, it pushes the tax obligation to a future date when the replacement property is eventually sold. It is the official record of the exchange for the year the transaction occurs.

Qualifying Property for a Like-Kind Exchange

For a property to be eligible for a like-kind exchange, it must satisfy two conditions. The first is that the property must have been held for productive use in a trade or business or for investment purposes. This means that personal-use assets, such as a primary residence or a second home used mainly for personal recreation, are explicitly disqualified from this tax-deferred treatment.

The second condition is that the relinquished property and the replacement property must be of a “like-kind.” Since 2018, like-kind exchange treatment applies only to exchanges of real property. A transaction can still qualify if it includes personal property that is incidental to the real estate, meaning its fair market value is no more than 15% of the replacement real property’s value. While the value of this personal property is taxable as “boot,” its presence does not disqualify the real estate portion of the exchange. The term “like-kind” refers to the nature or character of the property, not its grade or quality, so an apartment building can be exchanged for a parcel of raw land.

This broad definition provides flexibility for investors. A qualifying exchange could involve trading an office building for a shopping center or a single-family rental for a multi-unit apartment complex. Conversely, an exchange of a rental property for a personal residence would not qualify because the replacement property is not held for investment or business use.

The Exchange Timeline and Key Rules

Executing a like-kind exchange requires strict adherence to specific timelines. From the moment the sale of the relinquished property closes, the taxpayer has exactly 45 days to identify potential replacement properties in writing. This is known as the 45-day identification period, and it is an inflexible deadline.

Following the close of the relinquished property, the taxpayer has a total of 180 days to complete the acquisition of the identified replacement property. This 180-day exchange period runs concurrently with the 45-day identification period, meaning the taxpayer does not get 45 days plus an additional 180 days. The entire exchange must be finalized within this 180-day window.

A central figure in most deferred exchanges is the Qualified Intermediary (QI). To ensure the taxpayer does not have actual or constructive receipt of the sale proceeds, which would disqualify the exchange, the funds from the sale are held by a QI. This independent third party holds the funds in escrow and uses them to acquire the replacement property on behalf of the taxpayer.

Information Required for Form 8824

Completing Form 8824 accurately requires gathering specific details about the properties and the financial aspects of the exchange. The form is divided into several parts that systematically calculate the outcome of the transaction. Proper preparation involves collecting all necessary data before attempting to fill out the form.

Parts I and II of the form require descriptive information about the properties. You must provide a description of both the relinquished and replacement properties, including their addresses. This section also requires the dates the relinquished property was transferred and when the replacement property was identified and received to verify compliance with the 45-day and 180-day rules.

Part III is where the financial calculations take place. You must report the fair market value (FMV) of the like-kind property received, the FMV of any other property or cash received, and any liabilities that were assumed or transferred. This is also where you will account for any “boot,” which is non-like-kind property received, such as cash or a reduction in mortgage debt. The receipt of boot can trigger a taxable gain, and this section determines the exact amount of that recognized gain.

The information from Part III is used for the basis calculation for the new property. The basis of the property you gave up, plus any exchange expenses and additional cash paid or debt taken on, is adjusted to become the basis of the new property. This new basis is a carryover basis that reflects the deferred gain from the exchange and is important for calculating depreciation.

Reporting the Exchange to the IRS

Once Form 8824 is completed, it is not submitted as a standalone document. It must be attached to the taxpayer’s main federal income tax return for the year in which the exchange was initiated. For an individual, this would be Form 1040; for a corporation, it would be Form 1120.

The deadline for filing Form 8824 is the same as the deadline for the associated tax return, including any extensions. For example, if a calendar-year taxpayer completes an exchange, the Form 8824 must be filed with their tax return by April 15 of the following year, or by the extended deadline if an extension is filed.

After filing, the IRS uses the information on Form 8824 to track the deferred gain. The form establishes the adjusted basis of the new property, which is the value used to calculate depreciation deductions and the eventual capital gain when the replacement property is sold. Special rules require filing the form for two years following an exchange with a related party.