What Is Form 8824: Like-Kind Exchanges

Form 8824 is a tax document used to report the exchange of certain types of property. The primary function of this form is to facilitate the deferral of capital gains tax that would otherwise be due upon the sale of a property. This tax deferral is permitted under Section 1031 of the Internal Revenue Code when an owner exchanges one qualifying property for another of a “like kind.” In simple terms, instead of selling an investment property and buying another, a taxpayer can swap them, potentially postponing the tax on any appreciation. The form itself guides the taxpayer through the process of calculating any taxable gain and establishing the tax basis for the newly acquired property.

When to File Form 8824

A taxpayer must file Form 8824 when they engage in a like-kind exchange. Following the passage of the Tax Cuts and Jobs Act of 2017, these exchanges are now limited to real property. This means personal property, such as equipment or collectibles, no longer qualifies for this tax-deferred treatment. Real property is generally defined as land and anything permanently built on or attached to it. The property must be held for investment purposes or for productive use in a trade or business to qualify.

Two strict timing rules govern these transactions. First, the taxpayer must identify the potential replacement property in writing within 45 days of transferring their original property. Second, the taxpayer must receive the replacement property within 180 days of the original transfer, or by the due date (including extensions) of their tax return for the year of the transfer, whichever is earlier.

If a transaction meets these specific criteria for a like-kind exchange of real property, filing Form 8824 is mandatory. This filing requirement exists for the tax year in which the property was transferred. It applies even if the entire gain is deferred and no immediate tax is due, as the form documents the deferral and establishes the basis of the new property for future tax purposes.

Information and Calculations for the Exchange

Before attempting to complete Form 8824, a taxpayer must gather specific information and perform several calculations. You will need detailed descriptions of both the property you relinquished and the property you received, including their physical addresses. The dates are also important; specifically, the date you transferred your old property, the date you identified the new property, and the date you officially received the new property must be documented.

You must determine the Fair Market Value (FMV) for both the property given up and the one received. You also need to account for any cash received or paid, as well as any liabilities, such as mortgages, that were assumed by the other party or that you assumed in the exchange. These elements are part of a key concept known as “boot,” which is any property received in the exchange that is not like-kind, including cash or debt relief.

A critical calculation is the adjusted basis of the property you relinquished. The adjusted basis is typically the original purchase price of the property, plus the cost of any significant improvements, minus any depreciation you have claimed over the years. This figure is used to determine the total economic gain on the transaction, referred to as the “realized gain.” The realized gain is the difference between the FMV of what you received and the adjusted basis of what you gave up. However, the “recognized gain,” which is the portion of the gain that is immediately taxable, is generally limited to the amount of boot you received.

Completing and Filing the Form

In Part I of Form 8824, you will enter the descriptive details you gathered, such as property descriptions and the relevant dates of the exchange transaction. Part III is where the financial figures you previously calculated are put to use to formally compute your realized gain, recognized gain, and deferred gain. This part of the form ultimately determines the amount of gain that is taxable in the current year and calculates the basis of the new like-kind property you received.

Part II of the form addresses special rules that apply if the exchange was conducted with a related party. The IRS has specific definitions for related parties to prevent certain tax avoidance strategies. If you conduct an exchange with a related party, you must file Form 8824 for the tax year of the exchange and for the two years immediately following it.

Form 8824 is not a standalone document; it must be filed with your annual federal tax return, such as a Form 1040 or Form 1120. Any recognized gain calculated on the form is typically carried over to other tax schedules, such as Form 4797, Sales of Business Property, or Schedule D (Form 1040), Capital Gains and Losses. In some situations, if boot from an exchange is received in a subsequent tax year, you may be able to report the gain using the installment method. This would require filing Form 6252, Installment Sale Income, along with Form 8824.