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Where to Report 1031 Exchange on Tax Return

March 1, 2024

Since the primary benefit of a 1031 exchange is tax deferral, you need to know the right way to report your exchange transactions on your tax return to qualify. This means you also need to know where to file the report to validate the tax-deferred status of the exchange.

The right place to report your 1031 exchange on your tax return is on Form 8824 Like-Kind Exchanges. The IRS form 8824 contains four sections where you’ll provide information about the exchange as required.

If you need expert assistance in reporting a 1031 exchange on your tax return, Universal Pacific 1031 Exchange has got you covered. Our experts have been handling successful 1031 exchanges for over 32 years. We don’t just provide guidance; we’re committed to helping you carry out a smooth and compliant tax-deferred exchange. Schedule a free consultation with us today – start an exchange or receive expert guidance on the tax filing and reports.

In this article, we’ll walk you through a step-by-step guide on where to report a 1031 exchange on your tax return, the role of 1031 exchange in tax planning, common tax reporting errors you should know, and how to avoid them. 

Step-by-Step Guide on Where to Report a 1031 Exchange on Your Tax Return

Step-by-Step Guide on Where to Report a 1031 Exchange on Your Tax Return

Filing a tax return for a 1031 exchange requires a proper understanding of the process. Below is a step-by-step guide to help you understand where and how to report it.

1. Confirm That Your Transactions Qualify

First, ensure your transaction qualifies as a 1031 exchange. Both the relinquished property and the replacement property must be like-kind, held for use in a trade or business or for investment, and located within the United States. In addition to that, confirm that you completed your transactions within the timeline for 1031 exchanges.

2. Fill out the IRS Form 8824

Form 8824, Like Kind Exchanges is the official form provided by the IRS for reporting like-kind exchanges. You can download Form 8824 on the IRS official website.

The form consists of four main sections: PART I to PART IV

  • Part I requires details about the like-kind properties exchanged. Such details include the descriptions of both the relinquished and replacement properties, the date the replacement property was identified and received, and other relevant transaction dates.
  • Part II is for related parties’ 1031 exchanges. Provide the relevant related party’s information and also attest that the exchange or sale of the property was not intended to avoid or evade taxes.
  • Part III calculates the realized gain or loss, recognized gain or loss, fair market value, and basis of the like-kind property received. Fill in the FMV of the like-kind properties you received, any cash received, and other relevant information.
  • Part IV is for deferral of gain from Section 1043 Conflict-of-Interest Sales. This part is to be filled out only by officers or employees of the executive branch of the federal government or judicial officers of the federal government. If this applies to you, here you report nonrecognition of gain under section 1043 on the sale of property to comply with the conflict-of-interest requirements. You can use Part IV only if the cost of the replacement property is more than the basis of the divested property.

3. Attach Form 8824 to Your Tax Return

After completing Form 8824, attach it to your federal income tax return for the year in which you did the exchange. If you conducted multiple exchanges in a single year, you must complete a separate Form 8824 for each exchange.

4. Report Other Capital Gains or Losses

If there are other capital gains or losses from the sale of properties or assets that do not qualify for a 1031 exchange, report these on Schedule D (Form 1040), “Capital Gains and Losses.” Also, take note of ordinary income depreciation recapture in your calculations. If you’re unsure about how to calculate or report any of these details, book a free consultation with our experienced Qualified Intermediary to guide you.

5. Crosscheck State Tax Requirements

5. Crosscheck State Tax Requirements

In addition to federal taxes, check the tax rules in your state regarding 1031 exchanges. Some states have specific reporting requirements or do not recognize 1031 exchanges in the same way the federal government does.

6. Maintain Accurate Records

Keep detailed records of your 1031 exchange, including all relevant paperwork related to both the relinquished and acquired properties, for future reference and in case of an IRS audit.

7. Consult a Tax Professional or a QI

The federal income tax return and reporting requirements of a tax-deferred exchange can be complicated sometimes. Especially when you have little or no experience, you need professional guidance to avoid mistakes that may attract severe consequences. Reach out to a tax advisor or a reputable QI to guide you throughout the process.

7 Common Reporting Errors and How to Avoid Them

7 Common Reporting Errors and How to Avoid Them

Mistakes in reporting your 1031 exchanges may attract consequences such as tax liabilities or even disqualify your exchange. You should avoid the common errors listed below:

  1. Incorrect or Incomplete Form 8824: Form 8824 is essential for calculating and reporting the realized gain, recognized gain, or basis of the new property. Any error in these calculations can lead to complications with the IRS. To avoid this, carefully review all entries on Form 8824, paying close attention to the calculations in Parts II and III. Use the IRS’s instructions for Form 8824 as a guide, and when in doubt, consult a tax advisor.
  2. Failing to Report the Exchange in the Correct Tax Year: A common error is reporting the exchange on your tax return for a year different from when the relinquished property was transferred. The correct approach is to report the exchange in the tax year during which the relinquished property was transferred, even if the replacement property was received in a subsequent tax year.
  3. Not Identifying Replacement Property in Time: Missing the 45-day identification and 180-day exchange completion deadlines may disqualify your transactions from tax deferral. So, be sure you understand and adhere strictly to these IRS timelines for identifying potential replacement properties and completing the exchange.
  4. Improper Identification of Replacement Property: The form requires you to fill in the details of the replacement property, including transaction dates. If the form shows any error in this section, your exchange may not qualify. So, pay close attention to the 1031 exchange property identification rules, especially if the exchange involves multiple properties. Rules you need to master include the Three-Property Rule, the 200% Rule, and the 95% Rule.
  5. Related Party Transactions Without Proper Holding Period: Engaging in an exchange with a related party and selling the acquired property within two years is another pitfall. If you’re considering an exchange involving a related party, understand the two-year rule to comply with IRS requirements.
  6. Misunderstanding Like-Kind Property: Assuming properties are like-kind when they do not meet IRS definitions can invalidate an exchange. For instance, exchanging an investment property for a primary residence does not qualify. It’s important to verify that both the relinquished and replacement properties meet the IRS criteria for like-kind.
  7. Inadequate Record-Keeping: Failing to keep comprehensive records of the exchange, including documentation of the relinquished and acquired properties, timelines, and communications with the QI, is a common oversight. You need to maintain detailed records of all aspects of the exchange process, from initial agreements to final settlements, for at least seven years, to support your tax filings in case of an audit.

The Role of 1031 Exchanges in Tax Planning

The Role of 1031 Exchanges in Tax Planning

The primary advantage of a 1031 exchange is the deferral of capital gains taxes upon the sale of an investment or business property. Instead of paying taxes on the gains immediately, you can reinvest the entire amount into another replacement property, potentially leading to more significant investment growth over time. You can continue this deferral through multiple exchanges. With that, you can grow your investments tax-deferred until you decide to sell for cash in a taxable transaction.

1031 exchanges can also be a tool in estate planning. Since you can defer capital gains taxes indefinitely, if properly structured, the property can be passed on to heirs on a stepped-up basis. A step-up is the fair market value of the property at the time of the investor’s death. This means your heirs may potentially sell the property with little to no capital gains tax liability, making it a powerful mechanism for transferring wealth to future generations.

Call for a free Consultation

Properly reporting a 1031 Exchange on your tax return helps you comply with IRS regulations while deferring capital gains taxes. To ensure you comply and make the best use of the tax deferral benefits, consider seeking the guidance of a financial advisor or a qualified intermediary. Our experts at Universal Pacific 1031 Exchange possess the necessary expertise to assist with the reporting of your return tax. Contact us today to schedule a complimentary consultation.

About The Author

Michael Bergman, CPA
Michael Bergman is a California licensed CPA and Real Estate Broker with over 32 years of experience in commercial real estate. Specializing in 1031 tax-deferred exchanges and financial oversight, his expertise is invaluable for complex real estate transactions. Michael’s unique blend of financial acumen and real estate knowledge positions him as a trusted advisor in the industry, offering sound advice and strategic insights for successful property management and investment.

Don’t let taxes hinder your property investment decisions. Connect with us today for a free, no-obligation 1031 exchange consultation. Let us help you navigate the process with ease.