Navigating IRS Form 8824: A Guide to Reporting Like-Kind Exchanges
By David Gorenberg
For real estate investors and business owners, like-kind exchanges under IRC Section 1031 can offer significant tax deferral opportunities. After participating in a 1031 Exchange, taxpayers must complete and submit IRS Form 8824 to remain compliant with the exchange rules.
This article explores the purpose, structure, and filing requirements of Form 8824, providing a basic understanding for anyone involved in qualifying property exchanges.
What Is IRS Form 8824?
IRS Form 8824, entitled Like-Kind Exchanges (and section 1043 conflict-of-interest sales), is the form used to report a 1031 exchange to the IRS. When a taxpayer exchanges qualifying business or investment property for another qualifying business or investment property following the strict IRS rules, the taxpayer will be eligible to defer their capital gains taxes under Section 1031.
This form serves two critical purposes:
- It documents the details of the exchange, including the properties involved, compliance with the statutory timing requirements, and the parties involved in the transaction.
- It calculates the realized gain or loss, the amount of gain deferred, and the adjusted basis of the replacement property.
Understanding Like-Kind Exchanges
A like-kind exchange allows taxpayers to defer recognition of capital gains and related state (if applicable) and federal income tax liability on the exchange of qualifying business or investment property. The term “like-kind” is broadly defined for real estate and refers to the nature or character of the property, not its grade or quality. Thus, all business or investment property is “like-kind” regardless of asset class.
To qualify for a Section 1031 exchange:
- Both the relinquished and replacement properties must be held for productive use in a trade or business, or for investment;
- Properties must be exchanged in a properly structured series of transactions (rather than simply a sale followed by a purchase);
- Strict timelines must be observed. The replacement property must be identified within 45 days and acquired within 180 days of the transfer of the relinquished property.
Key Components of Form 8824
Form 8824 is divided into four parts:
- Part I: This section describes the properties involved, the timing of the disposition of the relinquished property, the timing of the identification of the replacement property as well as the timing of the actual acquisition of that property. The taxpayer is also asked to acknowledge whether the exchange occurred between related parties.
- Part II: This section requires the taxpayer to disclose the identity of the related party disclosed in Part I, their relationship with the taxpayer, their Social Security or Tax Identification Number, and their address. It also asks the taxpayer to verify whether either party disposed of their replacement property within the preceding two years, and whether that disposition qualifies for one of three narrow statutory exemptions to the two-year holding period.
- Part III: This is where the taxpayer calculates the realized and recognized gain or loss from the exchange, determines the basis of the new, replacement property, and discloses the value of any non-like-kind property involved in the transaction.
- Part IV: This section does not apply to Section 1031 exchanges, but rather to Section 1043 Conflict-of-Interest sales. The note at the top of this section indicates that this part is used only “by officers or employees of the executive branch of the federal government or judicial officers of the federal government” (and certain related parties) involved transactions involving Section1043.
Accurate reporting is essential to a valid 1031 Exchange. Mistakes on Form 8824 can result in audits or unexpected tax liabilities. For this reason, it’s highly recommended that taxpayers participating in Like-kind Exchanges consult with a tax advisor who is well-versed in 1031 exchange regulations.
Filing Requirements and Deadlines
Form 8824 must be filed with your federal income tax return (Form 1040, 1120, 1065, etc.) for the tax year in which the exchange took place. It should be submitted by the tax return’s original due date, including extensions if applicable.
Conclusion
Form 8824 plays a crucial role in documenting and preserving the tax-deferral benefits of a like-kind exchange. Whether you are an individual investor or a business entity, properly reporting these transactions is essential to documenting compliance with the 1031 rules and regulations and maximizing long-term investment goals. Given the complexity of the rules and calculations, partnering with a qualified CPA and/or tax attorney is highly encouraged.
The material in this article is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.
David Gorenberg is a third-generation real estate investor, an attorney and Certified Exchange Specialist®, and serves as Director of Education for Accruit. Members of National REIA can take advantage of special pricing from Accruit. Learn more by contacting David directly at 215.770.6354, or by visiting www.accruit.com.
