Your 1031 exchange must be reported by completing Form 8824 and filing it along with your federal income tax return. If you completed more than one exchange, a different form must be completed for each exchange. For line-by-line instructions on how to complete form, download the instructions here.
It is very important that you file Form 8824 along with your return, since your settlement agent will file a 1099-S upon the sale of your property. Taxpayers are often confused as to why a settlement agent would file the 1099-S with the IRS when they are doing a 1031 Exchange. Your settlement agent is required to submit the 1099-S upon the completion of every sale and Form 8824 is your way of notifying the IRS that you did an exchange on that sale and may have deferred your tax liability.
Section 1031(a) states the recognition rules for realized gains and losses that arise as a result of an exchange be like-kind property held for productive use in a trade, business or for investment. It also states that the property to be exchanged must be identified within 45 days, and received within 180 days.
1031(b) states when like-kind property and boot can be received. The gain is recognized to the extent of boot received.
1031(c) covers cases similar to those in 1031(b), except when the transaction results in a loss. The loss is not recognized at the time of the transaction, but must be carried forward in the form of a higher basis on the property received.
1031(d) defines the basis calculation for property acquired during a like-kind exchange. It states that the basis of the new property is the same as the basis of the property given up, minus any money received by the taxpayer, plus any gain (or minus any loss) recognized on the transaction. If the transaction falls under 1031(b) or (c), the basis will be allocated between the properties received and for purposes of allocation. The value assigned to the property is an amount equivalent to its Fair Market Value at the date of the exchange.
1031(e) stipulates that livestock of different sexes do not qualify for a like-kind exchange.
1031(h)(1) stipulates that real property outside the United States and real property located in the United States are not of a like-kind.
Always check with your tax adviser to confirm your individual exchange guidelines.
Accountants and CPAs can be helpful when reporting your tax-saving 1031 Exchange. If you would like us to refer you to a tax advisor who is familiar with Section 1031 of the Internal Revenue Code, just ask.