How to Report a 1099 Exchange Transaction

People searching for a “1099 exchange transaction” are often looking for what is correctly termed a “1031 exchange” under the Internal Revenue Code. The term “1099 exchange” is a common misnomer, likely stemming from the various Form 1099 documents used to report income. A 1031 exchange is a tax-deferral strategy for investment or business real property, allowing a taxpayer to postpone paying capital gains tax on a sale by reinvesting the proceeds into a new, similar property.

Core Requirements for a 1031 Exchange

A primary requirement for a 1031 exchange is that it must involve qualifying property. Following the Tax Cuts and Jobs Act of 2017, these exchanges are restricted to real property, such as land and buildings. Both the property being sold (the “relinquished property”) and the one being acquired (the “replacement property”) must be held for productive use in a trade, business, or for investment. Properties for personal use or those held for resale do not qualify.

To achieve full tax deferral, the replacement property must have a fair market value equal to or greater than the relinquished property. The investor must also reinvest all net equity from the sale of the old property into the new one.

The Exchange Timeline and Key Parties

A 1031 exchange has a strict timeline with two deadlines that run concurrently from the moment the relinquished property sale closes. These deadlines cannot be extended, except in cases of federally declared disasters. The first is the 45-day identification period.

Within 45 days of the sale, the taxpayer must identify potential replacement properties in a signed written document. To satisfy IRS requirements, the taxpayer must meet one of three rules. The three-property rule allows identifying up to three properties of any value. The 200% rule permits identifying any number of properties if their combined value does not exceed 200% of the relinquished property’s value. The 95% rule requires acquiring at least 95% of the value of all identified properties if the 200% threshold is exceeded.

The second deadline is the 180-day exchange period. The taxpayer must acquire the replacement property within 180 days of the original sale, or by the due date of their tax return for that year, whichever is first. After the 45-day identification window closes, the investor has the remaining 135 days to finalize the purchase.

A Qualified Intermediary (QI) is required to prevent the taxpayer from having “constructive receipt” of the sale proceeds, which would invalidate the exchange. The QI is a neutral third party who holds the funds from the sale and uses them to acquire the replacement property. An investor’s agent, such as their attorney or real estate broker, is disqualified from acting as a QI.

Understanding Boot and Its Tax Implications

In a 1031 exchange, “boot” is any non-like-kind property received by the taxpayer. Receiving boot does not disqualify the exchange but makes it partially taxable rather than fully tax-deferred.

Common forms of boot include cash received from the sale proceeds or a reduction in mortgage debt, where the debt on the new property is less than the debt on the old one. Personal property included in the transaction, such as furniture, is also considered boot.

Any boot received is taxable as a capital gain, up to the total gain realized on the sale. For example, if an investor sells a property for $500,000 and reinvests only $400,000, the $100,000 difference is cash boot and would be subject to capital gains tax, assuming the total realized gain was at least that much.

Information and Documentation for Reporting

Before preparing a tax return, you must collect all relevant data. This includes descriptions and addresses for both properties, the date the relinquished property was transferred, and the dates the replacement property was identified and acquired. You will also need the name and taxpayer identification number of the Qualified Intermediary.

The transaction is reported to the IRS on Form 8824, Like-Kind Exchanges. This form guides the taxpayer through calculating the realized gain, the recognized gain from any boot, and the adjusted basis of the new property. Part I captures property information, Part II addresses related party involvement, and Part III contains the gain or loss calculations.

The Filing Process

The completed Form 8824 must be attached to your federal income tax return for the tax year in which the relinquished property was sold. This is required even if the 180-day exchange period extends into the next tax year. If the exchange is not complete by the tax filing deadline, you may need to file an extension.

The settlement agent at closing will file a Form 1099-S with the IRS reporting the gross proceeds from the sale. Filing Form 8824 is how you notify the IRS that the transaction was part of a tax-deferred exchange.

The deferred gain from the exchange reduces the basis of the new property. This will affect the calculation of capital gains when that property is eventually sold, making proper record-keeping important.