How to Report Your 1031 Exchange On Your Tax Return
Carl E. Sera, CMT
October 6, 2020
You have completed your 1031 exchange—sold your relinquished property and reinvested the sale proceeds in the purchase of replacement property. But the IRS requires that you report the details of your 1031 exchange for tax purposes. If you are doing a 1031 exchange for the first time, you may be wondering what the IRS wants to know and how you can successfully report the exchange.
In this article, you will learn more on how to report your 1031 exchange to the IRS for tax purposes.
What Are the Ways to Report A 1031 Exchange to The Internal Revenue Service?
If you are doing a 1031 exchange, the IRS requires that at the completion of the exchange, you report all there is to know about the exchange to the IRS via the Form 8824. The Form 8824 is used by real estate investors to report any 1031 exchange transactions that occurred during a tax year.
However, if you sold your relinquished property in December 2018 and failed to purchase the replacement property till 2019, then the Form 8824 must be attached to your 2018 tax return. Failure to follow the 1031 exchange tax rule or by filing the Form 8824 incorrectly, you may be held liable for taxes and penalties by the IRS.
Generally, the Form 8824 requires the following information:
- Descriptions of the properties exchanged
- Gain or loss on sale of other (non-like-kind) property given up
- Dates that properties were identified and transferred
- Cash received or paid; liabilities relieved or assumed
- Any relationship between the parties to the exchange
- Adjusted basis of like-kind property given up; realized gain
- Value of the like-kind and other property received
The Form 8824 is structured into three broad categories with several sections requiring different information. We will discuss these categories in more detail below.
Part I of the Form 8824 covers the relevant information about the properties (relinquished and replacement) in exchange. You will need to state the address and description of both properties in exchange. You will also need to include the date you identified the replacement property and when you received title to it. For example, 937 Carlton Rd, New York, PA / Office Building.
Part II of the Form 8824 covers like-exchange between related parties. That is, if you did an exchange with a family member or entities in which you have a stake or interest in. Remember that related party include your spouse, brother, sister, grandparents, trust, and partnership. If you didn’t do the exchange with a related party, then you should skip line 7-11 in the Form 8824.
Part III of the Form 8824 is mainly for reporting realized gains or losses and the basis of the properties in exchange. Filling the part III of the Form 8824 allows the IRS to keep track of your taxable gains or losses. The Part III starts from line 12-25 and it focuses on the fair market value of the exchange properties, adjusted cost basis of the relinquished property, and the sum of any cash paid to you by the other party.
While it is very important that you fill the Form 8824 correctly, you should seek the help of a competent local Tax Advisor to help you with the process. Remember that the purpose of this article is for informational purposes only and should not replace the service of a tax advisor.