This is your simple guide to 1031 exchange tax reporting.
Nobody enjoys paying their taxes. While we can’t make it fun for you, we can at least help your 1031 exchange tax reporting make more sense.
In this post, you’ll learn 5 important things:
- When to report your 1031 exchange
- Which forms you need (especially Form 8824)
- What happens when you have leftover “boot”
- How to report a failed 1031 exchange
- How to handle multiple properties or exchanges
Caution: This post does not replace your tax adviser. Unless you also speak with an expert, no guide can guarantee your filing is done correctly.
With that now out of the way, let’s dive in.
1. When do I report my 1031 exchange?
First, wait until your 1031 exchange is complete.
Do not report an exchange that is ongoing. Also, Do not file taxes until your exchange is complete. This is the last step in the 1031 exchange process.
Follow these rules:
- Has your exchange been initiated and completed within the same tax year?
File your return on a normal schedule and report the exchange immediately.
- Is your exchange initiated but not completed? (You have not yet acquired all desired replacement property.)
You must wait until you acquire all the replacement property before filing. If your 180th day is before the April filing deadline, you can file your return on time.
- Is the 180th day after the April filing deadline and your exchange is not completed?
You will need to file for an extension.
Keep in mind that filing an extension will delay your entire tax return, not just the forms related to your 1031 exchange.
2. How do I report my 1031 exchange? Which IRS form(s) do I need?
All 1031 exchanges report on Form 8824.
If you need to file an extension, use Form 4868.
As with other such forms, the IRS makes available an HTML version of their official instructions. It’s worth giving these at least a quick review; the IRS revises the form and their instructions every year.
Wait, that’s a lot of instructions. Do I need to read them all?
No, not really.
If all you want are the specific, line-by-line instructions for Form 8824, skip down do the part that says “Specific Instructions”.
Don’t skip the beginning parts right away!
Or, at least not all of them. Some of the important topics covered include:
- Multiple exchanges
- Multi-asset exchanges
- Property used partly as a home
- Special rules for Qualified Opportunity Funds
Furthermore, if you aren’t sure, ask your tax adviser or call your 1031 coordinator for help.
Form 8824 looks complicated. Can I fill it out on my own?
If you want to tackle the form yourself, break it down into more manageable pieces.
- Part I – describe the relinquished (sale) property and the replacement (buy) property.
- Part II – related parties only matter if you involve family or businesses that you own in your 1031.
- Part III – calculating gains or losses. The IRS wants to know how to incorporate your 1031 exchange within your complete tax return.
- Part IV – applies to certain federal employees to avoid conflicts of interest.
Some parts of Form 8824 are complicated, especially for exchanges that weren’t as simple as “sell one, buy one.”
Remember the purpose of Form 8824. First and foremost, it calculates how much gain is deferred. Second, it checks to make sure that you followed the rules.
Consult your tax professional before filling out a tax form. Keep in mind that Form 8824 can have downstream consequences for other IRS forms in your tax return. If you make a mistake, the IRS often requires that you submit an amended return.
3. I have leftover “boot”. How do I report that income?
Yes, you need to report any income leftover from a partially completed 1031 exchange.
Make sure that you report the income received in the correct tax year. In some cases, this will be different than the tax year in which you report your 1031 exchange!
Perhaps you start a 1031 exchange in 2019 and finish it in 2019. You don’t use all of your proceeds, getting back $5,000 at the end of the 1031 process. The resulting cash “boot” is identified on Form 8824 and further reported as recognized gain on your return.
If, however, you start the 1031 exchange in 2019 and finish it in 2020 — assuming you had what the IRS calls “bona fide intent” to complete the exchange — you have options.
For instance, you can elect to report the exchange as an installment sale in the tax year of the sale of the (first) relinquished property. This means you can either report the gain in 2019 per normal or report the gain in 2020 as part of the installment sale.
Reporting gain using an installment sale method
Step one: determine that you want to report income** in the 2nd tax year
Depreciation recapture cannot be deferred into the following tax year. Recapture is always due in the taxable year of the relinquished property sale.
4. What if my 1031 exchange failed?
A failed 1031 exchange is normally treated as though the attempted exchange did not take place. In other words, you just report the depreciation recapture, capital gain, and income. There is no form to fill out. There are no IRS fines or fees.
However, if your exchange period (45-days or 180-days depending on whether you identify replacement property) ends in the tax year following the year in which the exchange began, then you can elect whichever year you want the income recognized.
Example: You sell a property as part of an exchange on November 30th, 2019. This means the exchange period ends in 2020. You can either
- Recognize the capital gain and report the tax on your 2019 return, or
- Recognize the capital gain using the installment sale method on your 2020 return
Use the method described above when reporting gain using the installment sale method.
5. What if I sold or bought multiple properties?
So-called “multi-asset” exchanges can be tedious to report.
Here are the IRS’ instructions: If you transferred and received (a) more than one group of like-kind properties or (b) cash or other (not like-kind) property, don’t complete lines 12 through 18 of Form 8824.
Instead, attach your own constructed statement showing how you figured the realized and recognized gain, and enter the correct amount on lines 19 through 25.
Report any recognized gains on your Schedule D; Form 4797, Sales of Business Property; or Form 6252, Installment Sale Income, whichever applies.
For reference, here are links to
- Schedule D is part of Form 1040
- This is where most people report capital gains and losses from the sale of property
- If your 1031 exchange resulted in capital gains invested in a Qualified Opportunity Fund, you’ll need to also fill out Form 8949
- Used for the sale of business property by businesses that are flow-through entities
- Any capital assets not reported on Schedule D must be reported on Form 4797
- As described earlier, used for installment sale income when a 1031 exchange straddles multiple tax years
What if I completed more than one exchange?
If you complete multiple separate exchanges in a given tax year, open up a spreadsheet. This spreadsheet will collect all of the information you would normally give if reporting a single 1031 exchange.
Put the properties that you exchanged along one axis and then the fields that the IRS wants to be answered in Form 8824 along the other axis.
Then, take your actual Form 8824 only filling out the following:
- Top of page – Name and ID number
- Line 1 – Write the word “Summary”
- Line 23 – Write the total recognized gain from all exchanges
- Line 25 – Write the total basis of all replacement properties
Bonus: What about my State Tax Return?
First, determine whether you need to report capital gains on your state return. Nearly all states recognize 1031 exchanges. Many others do not assess a state income tax — thereby making it unnecessary to report capital gains on a state return.
- Pennsylvania does not recognize tax-deferred exchanges.
- No income tax – Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming
Consult your local tax board or collection agency website to verify the rules surrounding 1031 exchanges and tax-deferral.