The Form 8824 is due at the end of the tax year in which you began the transaction, as per the Form 8824 Instructions.
Even if you did not close on your Replacement Property until the following year, Form 8824 is still due with your tax return for the year when it all began, the year in which you sold your Relinquished Property.
If your Section 1031 Exchange is not completed by the April 15 deadline for reporting it, the Form 8824 Instructions require that you file for an application for an extension on your filing deadline with the IRS.
Failure to report your 1031 Exchange will invalidate your Exchange and trigger the Capital Gains tax and the Depreciation Recapture, and probably some penalties.
The name of the form is Form 8824, it’s called Like-Kind Exchanges, and you attach it to your Form 1040 if you are an individual.
FORM 8824 INSTRUCTIONS
The form is divided into Part I through Part IV.
But Part II concerns transactions with Related Parties and Part IV concerns transactions by certain government officials with conflicts of interest, so you will only be concerned with Part I and Part III for a regular transaction.
Form 8824 is a little different from most tax forms, and it might help if you can see what we are working with, so you can download the form and have it for viewing, at irs.gov/pub/irs-pdf/f8824.pdf.
The Form 8824 Instructions, and some other resources, are at irs.gov/pub/irs-pdf/i8824.pdf.
I can’t direct you to the IRS Publication for the Form 8824, because they don’t have one.
If you are not familiar with any of the terms on Form 8824 and in the Instructions, please check out our Dictionary.
Now I will show you where to get the information to put on the form, and then show you where to put it on the form.
SUMMARY: Form 8824 is a very difficult form to complete. And the Instructions provide no help. But with the information from your HUD-1, and using the Example Scenario we provide, you can figure out what number to put on each line.
READING TIME: Approximatly 8 minutes.
It's Like A Seminar In A Book
FORM 8824 AND THE HUD-1
First, let’s discuss where you will get the information that will be required to complete the form.
When you close on your properties, sale of the Relinquished Property and puchase of the Replacement Property, you will receive a HUD-1 Settlement Statement to inspect and approve, and then you will be asked to sign it.
You will take a copy of it with you when you leave the closing.
Take care of your copy. This document is protected by the laws of confidentiality and will not be given to anyone else.
Some of the items on your HUD-1 Settlement Statement might be marked with the symbol “POC” and that means “Paid outside closing.”
For instance, the Surveyor might have required payment before releasing the survey, and you might have paid for that.
If so, the amount that you paid will be shown, probably on line 1301 of page 2, and will be marked “Survey POC” and show the amount that was paid.
Otherwise, all of the important information related to your transaction, and most of what you need to complete IRS Form 8824, will be identified and reported on the HUD-1.
- Name of Buyer,
- Name of Seller,
- Property location,
- Settlement date,
- Contract sales price,
- Value assigned to personal property,
- Loan payment amount,
- Deposit of earnest money,
- Amount of new loan,
- Existing loan assumed,
- Amount of real estate commission,
- Amount of property taxes,
- Reserves deposited with the lender,
- Charges for the closing and title insurance, and
- Recording fees for documents.
FORM 8824, THE LIKE KIND EXCHANGE FORM
The combination of the HUD-1 and the information on our Capital Gains Tax page will be all that you need for the completion of the form.
For review, we are dealing with the following scenario.
FORM 8824 EXAMPLE
- Alan Adams bought a Duplex ten years ago for $200,000 cash.
- He assigned a value of $20,000 to the land.
- The furniture and furnishings had negligible value, none assigned.
- He began claiming depreciation allowance on the $180,000 building.
- He spent $30,000 cash in capital improvements on two garages and began claiming depreciation.
- He borrowed $30,000 from the bank, putting a lien on the property.
- The balance on the note is now $18,000.
- He spent $20,000 cash on furniture and furnishings and began claiming depreciation.
- He has claimed $65,400 in straight-line depreciation on the Duplex.
- He has claimed $7,644 in straight-line depreciation on the two garages.
- His total straight-line depreciation claimed is $73,044.
- He has claimed $15,200 in accelerated depreciation on the furniture and furnishings.
- His total overall depreciation claimed is $88,244.
- His basis in the property is $161,756 (200,000 plus 30,000 plus 20,000 minus 88,244).
- Bob Baker has offered him $400,000 for the Duplex.
- His total costs of the sale will be $10,000.
- His net sales proceeds will be $372,000 (400,000 minus 10,000 minus 18,000)
- His Capital Gains will be $228,244 (400,000 sales price minus 161,756 depreciation basis minus 10,000 closing costs).
- $15,200 of the $228,244 will be Accelerated Depreciation Recapture, taxed at 39.6%, resulting in $6,019 tax.
- $73,044 of the $228,244 will be Straight-line Depreciation Recapture taxed at 25%, resulting in $18,261 tax.
- $140,000 of the $228,244 will be regular Capital Gains (400,000 minus 10,000 minus 200,000 minus 30,000 minus 20,000) and will be taxed at 20%, resulting in $28,000 tax.
- His total tax liability will be $52,280 (6,019 plus 18,261 plus 28,000) on the $228,244 Capital Gains.
- He will purchase a Fourplex as his Replacement Property at a price of $700,000.
- His closing costs will be $5,000.
FORM 8824 WORKSHEET
Part I of Form 8824 is called “Information on the Like-Kind Exchange” and contains seven lines requesting information about your Exchange.
*Line 1. Description of like-kind property given up.
Insert a brief description such as “Duplex located at 123 Anywhere Street, City, State, Zip.”
If the transaction involved personal property, add something like “Furniture, furnishings, and appliances for six bedrooms, two living rooms, two laundry rooms, two kitchens, and four bathrooms.”
Don’t worry about whether you are providing enough information.
If you are not, and the IRS wants more, they will just ask you. You will not suffer any consequences.
Just make sure that the information you do provide is accurate.
*Line 2. Description of like-kind property received.
Enter information similar to the above for the Replacement Property.
*Line 3. Date like-kind property given up was originally acquired.
This is asking for the date you originally acquired the property that you sold, the Relinquished Property. This will prove that your Capital Gains is actually long-term.
*Line 4. Date you actually transferred your property to the other party.
This will be a date more than 12 months from the date on the line above.
*Line 5. Date like-kind property you received was identified by written note to another party.
This is the date you notifed your QI under the 45-day period.
If you received your Replacement Property prior to the 45-day period and did no notification, enter the date that you received the Replacement Property.
*Line 6. Date you actually received the like-kind property from other party.
This is the date that you closed on your Replacement Property, and will show that you satisfied the 180-day period requirement.
*Line 7. Was the exchange of the property given up or received made with a related party, either directly or indirectly. If “Yes,” complete Part II. If “No,” got to Part III.
We are assuming that you have not done an Exchange with a Related Party, so you will mark this “No” and go on to Part III.
FORM 8824 CALCULATIONS
This Part III is called “Realized Gain or (Loss), Recognized Gain, and Basis of Like-Kind Property Received.”
It contains lines 12 through 25.
Lines 12 through 14 are used to report any part of your Relinquished Property transaction which was not like kind property.
On Line 12 you report the fair market value of that property and on line 13 you report your basis in the property, then subtract line 13 from line 12, and put the results on line 14.
Skip lines 12 through 14 if all of the Relinquished Property was like kind, which we are assuming in our Examples.
*Line 15. Cash received, FMV of other property received, plus net liabilities assumed by other party, reduced (but not below zero) by any exchange expenses you incurred.
This is the way the IRS asks if you received any boot.
For Adams this number is zero.
*Line 16. FMV of like-kind property you received.
This is the sales price of your Replacement Property plus any cost of acquisition.
For Adams the number is $705,000.
*Line 17. Add lines 15 and 16.
You can do this. It is $705,000.
*Line 18. Adjusted basis in like-kind property you gave up, net amounts paid to other party, plus any exchange expenses not used on line 15.
The adjusted basis in the Duplex is $161,756.
The bank loan was $333,000.
The total is $494,789.
But remember that we have to subtract the amount of $18,000 as the loan payoff amount.
So, the total for this line is $476,756.
*Line 19. Realized gain or (loss). Subtract line 18 from 17.
This number is $228,244. This is the amount of capital gains to be deferred.
*Line 20. Enter the smaller of line 15 or line 19.
This number is zero.
*Line 21. Ordinary income under recapture rules. Enter here and on Form 4797, line 16.
If this had not been a tax deferred exchange, but only a partially tax deferred exchange, some of the gain would have been taxable, and if that part had been the recapture of depreciation at the stipulated rate of up to 25%, or at the individual’s ordinary income tax rate, it would be entered here.
The number is zero.
*Line 22. Subtract line 21 from line 20.
Zero from zero is zero.
*Line 23. Recognized gain. Add lines 21 and 22.
This is how much of the capital gains is being taxed instead of being tax deferred.
Zero plus zero is zero.
*Line 24. Deferred gain or (loss). Subtract line 23 from 19.]
This shows how much of the capital gains is being carried over with tax deferral.
It is the entire amount shown on line 19, $228,244.
*Line 25. Basis of like-kind property received. Subtract line 15 from the sum of lines 18 and 23.
This is the depreciable basis in the new Fourplex.
The amount is $476,756.
If you will notice, you add this to the amount of deferred capital gains of $228,244 and you get the total of $705,000, the amount Adams paid for the Fourplex.
You can also get $705,000 by adding the net sales proceeds of $372,000 and the bank loan of $333,000.
Form 8824 is a very difficult form to complete.
The IRS starts out by assuming that two parties are swapping two pieces of property, which never happens.
They also assume that each party is assuming the other party’s debt, which also never happens.
The assume that one party is receiving the other party’s property, plus some money, which almost never happens.
The Form uses phrases like “like-kind property you gave up” and “net amounts paid to other party” and “FMV of other property received,” without any explanation of what they mean by “gave up” or “other party” or what number you are supposed to “net” so that you can figure out the amount.
In the Instructions, they try to explain things by using an example, which is one that I have never seen anything similar to in over thirty years of handling over two thousand closings.
But don’t be intimidated by the Form.
Understand your transaction and figure out what the numbers are supposed to be, and then make them fit where you know they are supposed to go, and assume that is what they are asking for.