IRS Form 8824 Explained: How to Report a 1031 Exchange

Investors and brokers who are new to 1031 exchanges may wonder if they have to report  them. The short answer is yes. This is done with an IRS Form 8824. It shows the IRS what you gave up, what you received, the timing of the exchange, whether you got any cash or other non-like-kind value, and how you calculated any taxable gain.

While 8824 forms may seem complicated at first, we’re here to break it all down for you. In this guide, we’ll explain what an 8824 form is, why they’re important, and common mistakes that may be made during tax season.

When Should You Report a 1031 Exchange to the IRS?

1031 exchanges need to be reported on the tax return for the tax year that the relinquished property was transferred even if the exchange was not completed in that same year.

If the exchange will not be completed by the deadline for filing, the taxpayer may need to file for an extension using Form 4868. Filing the return before the exchange is complete will automatically end the exchange and the capital gains would not be deferred.

Now, what happens if you or your client starts an exchange in one calendar year but it unable to acquire a replacement property? If the 1031 exchange fails, the money received can be treated as an installment sale and reported on the tax return of the year the money was received. Bona fide intent to complete the exchange must be demonstrated, though.

The taxpayer may also be required to report the exchange on their state tax return and some states have a specific reporting requirement when property sold in that state is exchanged for property out of state. We recommend consulting a tax advisor about the specifics of reporting each exchange.

How Do You Report 1031 Exchanges to the IRS?

To properly report your 1031 exchange to the IRS, you must fill out a Form 8824 along with your federal income taxes. If you completed more than one exchange, a different form must be completed for each exchange. The IRS offers a line-by-line downloadable to help you through this process.

So, why is it important to file an 8824 form to the IRS? To start, your settlement agent is required to file a 1099-S upon the sale of your property. Some taxpayers are often confused why this form is filed when doing a 1031 exchange. Simply put, it is your way of telling the IRS that you did an exchange on that sale and may have deferred your tax liability. Without filing a 1099-S and IRS Form 8824, you’ll be required to pay capital gain taxes.

Does the IRS Have a Statute of Limitations for Form 8824?

When reporting an IRS Form 8824 for a 1031 exchange, there is a statute of limitations you must follow. An investor has 3 years after the return is filed to audit the return. If the return is filed before the due date, the due date is considered the filing date. If the income not reported exceeds 25% of Taxpayer's gross income, the period for audit, (statute of limitations), is extended to 6 years. Because the gain excluded on a 1031 exchange may exceed 25% of Taxpayer's gross income, the 1031 exchange may trigger the 6 year statute of limitations.

Have Taxable Gains? Here’s How to Report Them

Taxable gains reported on Form 4797 or Schedule D, depending on the character of the property given up. Gain must be allocated between ordinary income depreciation recapture, unrecaptured 1250 gain, Section 1231 gain, and capital gain. 

If the exchange does not close until the next year, or if the Taxpayer takes back a note from the buyer, they may be able to report the taxable gain on the installment basis using Form 6252, Installment Sale Income. There are several circumstances when installment sale reporting is limited or not allowed, such as when the relinquished property has a mortgage in excess of basis. 

If you are considering seller financing, consult with your tax advisor for the tax effects on your transaction.

Common Mistakes Made When Filing IRS Form 8824  

With 8824 forms, the biggest mistakes are usually not “form-filling” mistakes alone. They’re a mix of 1031 eligibility issues, timing problems, and basis/math errors that may show up at any time. Here are some of the most common:

1. Assuming all real estate is 1031-eligible: Some investors assume “real estate for real estate” is enough. It is not. The IRS says Section 1031 generally applies to business or investment real property, not property held primarily for sale or personal use.

2. Misstating key dates: 8824 forms ask for the date the old property was transferred, the date replacement property was identified in writing, and the date the replacement property was actually received. It’s important to ensure these are written correctly when reporting to the IRS.

3. Thinking “tax deferred” means no taxes at all: 1031 exchanges and IRS Form 8824 filings do not eliminate taxes permanently. This is important to keep in mind, especially when finding a replacement property.

4. Filing in the wrong year: Qualified intermediaries help execute the exchange, but they do not replace the tax reporting requirement. The IRS says if you transferred property in a like-kind exchange during the current tax year, you must file Form 8824 with that year’s federal return.

5. Forgetting that Form 8824 is also a tax calculation form: Reporting an IRS Form 8824 determines current recognized gain and the basis of the replacement property, so errors here can carry forward into depreciation, future gain calculations, and later dispositions.

Are you considering a 1031 exchange? Have questions about your Form 8824 submission? Contact the First American Exchange Company team to discuss your options. With operations in all 50 states, our team bring more than a century of experience to investors and brokers alike.