The 1031 Forms Required to Report a Like-Kind Exchange

A 1031 exchange allows an investor to defer capital gains taxes on the sale of a business or investment property by acquiring a similar, or “like-kind,” property. This tax-deferral strategy is governed by Section 1031 of the Internal Revenue Code. To successfully execute this exchange, the Internal Revenue Service (IRS) requires detailed and timely reporting on specific forms for the exchange to be considered valid. Failing to meet these reporting standards can result in the immediate taxation of the entire gain from the property sale.

Information Needed to Report a 1031 Exchange

Before completing any forms, you must gather specific information. You will need detailed descriptions of both the property you sold (the relinquished property) and the property you acquired (the replacement property). This includes property addresses and a description of the property type, such as a commercial building or vacant land.

You must document specific dates for the transaction’s timeline. You need the date the relinquished property was transferred, which starts the exchange period. From this date, you have 45 days to identify potential replacement properties in writing. You also need the identification date and the date you received the replacement property, which must be no later than 180 days from the initial transfer or your tax return’s due date, whichever is earlier.

Financial figures are necessary for the exchange calculation. For the relinquished property, you need its fair market value (FMV), or sale price, and its adjusted basis, which is the original purchase price, plus capital improvements, less any depreciation taken. For the replacement property, you will need its FMV, or purchase price, and a tally of all exchange expenses, such as broker commissions and legal fees.

You must also account for any “boot,” which is non-like-kind property received in the exchange that can trigger a taxable gain. Cash boot is any sale proceeds not reinvested into the replacement property. Mortgage boot occurs if the debt on the replacement property is less than the debt on the relinquished property.

A Guide to Completing Form 8824

The primary document for reporting this transaction is Form 8824, Like-Kind Exchanges. This IRS form is structured to walk you through the calculation of your deferred and recognized gain. It is filed for the tax year in which you sold the relinquished property.

Part I of the form is for general information about your exchange. Here, you will provide the descriptions of the relinquished and replacement properties. You will also enter the required dates, such as when the properties were transferred, identified, and received, to show compliance with the exchange timelines.

Part II of Form 8824 addresses exchanges between related parties, such as family members or a corporation in which you hold a significant stake. This section ensures the transaction complies with rules designed to prevent tax avoidance. If the exchange is not with a related party, you can skip this part.

Part III is the form’s computational section. You will enter the FMV of the property received, any cash exchanged, and the FMV of any other property involved. The form guides you through calculating the realized gain—the difference between the total value received and the adjusted basis of the property you gave up. It then helps determine the recognized gain, which is the taxable portion of your realized gain, often due to boot. The remainder is the deferred gain, and the form concludes by calculating the new basis for your replacement property.

Integrating 1031 Forms with Your Tax Return

Form 8824 is part of your annual tax return, and its results carry over to other schedules. The transaction is reported on the form corresponding to the property type. A sale of business property is reported on Form 4797, Sales of Business Property. A sale of investment property is reported on Schedule D (Form 1040), Capital Gains and Losses.

These forms calculate the total gain from the sale as if it were a fully taxable event. After completing Form 8824, the deferred gain amount is used to adjust the figures on Form 4797 or Schedule D. You report the full sale and then subtract the non-taxable, deferred portion.

For instance, you would report the sale of a rental property on Form 4797 and then complete Form 8824 to calculate the deferred gain. You would then enter this deferred gain onto Form 4797. This shows the net taxable gain from the transaction that flows to your main tax return, such as Form 1040.

Filing Requirements and State Forms

Attach Form 8824, along with the corresponding Form 4797 or Schedule D, to your annual income tax return, such as Form 1040 for an individual or Form 1120 for a corporation. The package is filed for the tax year in which the relinquished property was sold, even if the replacement property was acquired in the following year.

Beyond federal obligations, you must consider state-level tax requirements. Most states with an income tax have their own rules for 1031 exchanges. Some states follow federal rules, while others have unique requirements, such as “claw-back” provisions that may tax the deferred gain if you later sell an out-of-state replacement property.

Check with your state’s tax agency to determine if any state-specific forms are required. Some states mandate their own like-kind exchange form or require annual reporting until the replacement property is sold. States may also have withholding requirements for non-resident sellers, though an exemption is often available when conducting a 1031 exchange.