Stop! What You Should Know Before Filing Your Taxes...

A 1031 exchange is reported on the tax return for the tax year in which the exchange begins, i.e. the tax year the relinquished property is transferred, using IRS Form 8824.  If an investor's exchange transaction starts late in 2009, he may need to file for an extension using Form 4868 in order to reflect the entire exchange on the appropriate tax return. 

FILING YOUR RETURN BEFORE YOUR EXCHANGE IS COMPLETE WILL AUTOMATICALLY END YOUR EXCHANGE PERIOD

In a 1031 exchange, the taxpayer must acquire all replacement property by the earlier of the date that is 180 days from the date the relinquished property closes, or the date the tax return is due, including extensions, for the sale of the relinquished property.  This means that for exchanges where the relinquished property closes late in the year (from approximately October 15th until the end of the year), the taxpayer must get an extension of the tax filing deadline in order to benefit from the full 180 day exchange period.  For example, if the relinquished property closes on December 1, 2009, and the taxpayer does not get an extension on the filing of his return, the taxpayer will only have until April 15, 2010 to buy all replacement properties.  If the taxpayer gets an extension, however, he will have until May 30, 2010 to acquire all replacement properties.
 
Once a tax return is filed, it cannot be amended to include the exchange or to obtain an extension of time to complete the exchange.  If the exchange is incomplete, the sale will need to be reported as a taxable event. 

WHEN YOU WANT THE EXCHANGE PERIOD TO EXPIRE EARLY

Sometimes exchanges are started late in the year and completed the next year before April 15th.  The investor may have identified three replacement properties and acquired one, but there is still some available cash.  The exchange company is required to hold the leftover cash until the sooner of when all replacement properties are acquired or the end of the exchange period.  In order to get his cash early, an investor can decide not to file an extension.  In that case, the exchange period will end on April 15, 2010, and the intermediary will be able to release any additional funds on April 16th.   If the taxpayer were to instead get an extension to the filing date of his tax return, the intermediary would be required to hold all remaining funds until the sooner of the expiration of the 180 day exchange period or the extended due date. 

REPORTING AN INCOMPLETE OR FAILED EXCHANGE

Sometimes an investor starts an exchange but is unable to acquire any replacement property.  Other times an investor may acquire some replacement property but have left over cash which will be taxable.  In both of those situations, if the investor starts the exchange in one year and receives the money in the following year, the boot received can be treated like an installment sale.  In other words, any cash received in the second year can be reported in that year rather than the year the relinquished property closed. 

MULTIPLE EXCHANGES

If an investor completes more than one like-kind exchange during the tax filing year, she can file a summary Form 8824 and attach her own statement showing all of the information requested on Form 8824 for each exchange. 

ADDITIONAL RULES

Certain rules may apply to your particular exchange transaction.  For example, if you transferred your relinquished property to a related party as part of your 1031 exchange, you must file Form 8824 with your tax return for not only that year, but for the two years following the exchange.  Also, additional filing requirements may apply to certain specialized transactions such as reverse exchanges or multi-asset exchanges. 
 

Download Form 8824
Download Form 8824 Instructions
Download Form 4868