What Is IRS Form 8824?

Form 8824 is used by the Internal Revenue Service (IRS) for like-kind exchanges. A like-kind exchange permits you to delay some or all tax returns.

Whenever you sell an object for a greater price than what you paid for it, you may have a capital gain. Whenever you promote something for less than what you paid, you may have a capital loss. Should you instantly purchase an identical property to trade the one you offered, the tax code calls this a "like-kind exchange.”

What Happens in an Exchange?

A like-kind exchange occurs when you trade an enterprise or funding property of an identical nature or character (for instance, an automobile or actual property). Such exchanges must be reported on IRS Form 8824. Typically, any taxable gain is deferred from a like-kind exchange, unless non-like-kind property — like money — is involved. Exchanges of personal-use property, securities, and stock do not qualify as like-kind exchanges. The following forms are involved in reporting such exchanges:

  • On Part I of Form 8824, you will list particulars concerning the previous property and the new property.
  • Part II of the form comes into play solely when a like-kind exchange entails "related parties" — members of a family or entities that you have a controlling interest in.
  • Part III is for reporting particulars about any gains or losses from the transactions that make up the exchange — this is how the IRS monitors your taxable gain or tax-deductible loss.
  • The form has a Part IV to be used solely for federal employees; it concerns conflict-of-interest guidelines.

Allowable Exchanges

Each entity and company, including corporations, partnerships, and sole proprietorships, can perform like-kind exchanges. Nonetheless, the properties concerned have to be used for enterprise or funding. Like-kind exchanges do not have to be precise replacements — an office building for an office building, for instance — however, they do need to be of the same "nature, character, or class," according to the IRS. You can do a like-kind exchange on boats used for fishing enterprises, but not for your spouse's sailboat.

Like-kind exchanges carry limits on how long you have to establish and purchase a substitute property:

  • 45 days from the date you sell to determine potential substitute property and notify the seller of the substitute property or your intermediary.
  • 180 days after the sale to finish the acquisition of the substitute property.

Failing to observe these deadlines might trigger the sale of the property to be acknowledged within the present tax year.

Exclusions and Deadlines

By law, a number of properties don't qualify for a like-kind exchange:

  • Shares
  • Bonds
  • Various securities
  • Ownership interest in a partnership enterprise
  • Certificates of trust
  • Interest in a trust as a beneficiary
  • Rights to sue

Completing the Income Tax Form 8824

This form should be included along with your tax return for the tax year during which a relinquishment of a property occurred. Typically, the IRS prefers using just one 8824 form and the attachment of a statement indicating the way you determined the gain if an exchange is entered into within one tax year. Transferring a relinquished property to an unrelated third-party and subsequently buying a substitute property from an associated party in a qualified intermediary structured exchange could also be deemed an invalid alternate by the IRS.

How to Report a 1031 Exchange on IRS Form 8824

A 1031 Exchange is reported on IRS Form 8824 together with the traditional tax return solely when the exchange is completed. The completed exchange is reported for the tax year during which the preliminary relinquished property (the property being offered) is settled and the 180-day exchange period has begun. If the ultimate substitute property is transferred within the subsequent year, Form 8824 won't be finalized until after that property is transferred. The 1031 might require a one-time extension of the tax year reporting.

Instructions for Form 8824

There aren't any particular directions offered by the 1031 regulations on determining cash received, cash paid, or net mortgage relief in exchange transactions. Tax reporting of 1031 Exchanges by tax professionals varies broadly, and there's no constant method utilized. A computational method known as the "balancing of the equities" technique is continuously used, although it's not prescribed by law.

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