How to Report a 1031 Exchange on Your Tax Return: Form 8824

To report a 1031 exchange on your tax return, file IRS Form 8824 with the return for the year you transferred the relinquished property. The form identifies both properties, confirms you met the 45-day and 180-day deadlines, calculates how much gain you recognize now versus defer, and sets the basis of the replacement property. You file Form 8824 even when you defer the entire gain and owe nothing extra.¹

Only real property held for business use or investment qualifies for Section 1031 treatment. Since the Tax Cuts and Jobs Act took effect in 2018, exchanges of equipment, vehicles, artwork, and other personal property no longer qualify.²

What to Gather Before You Start the Form

Every line on Form 8824 pulls from records you should already have. Assemble these first.

The Two Transfer Dates

Record the exact date you transferred the relinquished property to the buyer and the date you received the replacement property. Those dates prove you identified a replacement within 45 days and closed within 180 days (or by the due date of your return, including extensions, if that comes sooner).³ Your closing statements are the cleanest documentation.

Adjusted Basis of the Relinquished Property

Your adjusted basis is what you originally paid, plus capital improvements, minus all depreciation claimed or allowable. If you have been depreciating the property, the cumulative total should be on your prior Form 4562 records.

Fair Market Value of Both Properties

Use the gross selling price for the relinquished property and the gross purchase price for the replacement. These figures determine whether you received boot.

Boot

Boot is any cash or non-like-kind property you receive, and it triggers immediate recognition of gain.⁴ It also includes net mortgage relief. If the buyer assumed a $500,000 mortgage from you but you only took on a $350,000 mortgage on the replacement, the $150,000 difference is boot. New debt you assume and additional cash you contribute can offset debt relief, so itemize every liability on both sides.

The 45-Day Identification Notice

Under Treasury Regulation Section 1.1031(k)-1, your identification of replacement property must be in writing, signed by you, and delivered to the qualified intermediary or another party involved in the exchange (not to you or a disqualified person such as your agent) before midnight on the 45th day. Keep the notice with your tax records; the IRS may ask for it.

Part I: Identify the Properties

Part I asks for descriptions of the like-kind property you gave up and the property you received, plus the transfer dates. Use a clear property description and street address rather than only a legal description. The dates you enter are what the IRS matches against the 45-day and 180-day deadlines, so they must line up with your closing statements exactly.¹

Part II: Related Party Exchanges

Part II asks whether the exchange was with a related party. Related parties include family members (spouse, siblings, ancestors, and lineal descendants), entities you control with more than 50% ownership, trusts where you are the grantor or beneficiary, and other relationships defined under IRC Sections 267(b) and 707(b)(1).⁵

A related-party exchange starts a two-year holding clock. If either party disposes of the exchanged property within two years, the deferred gain snaps back into taxable income as of the disposition date.⁶ Exceptions exist for dispositions caused by death, involuntary conversions, or transactions the IRS accepts as not structured to avoid tax, but the default is strict.

Part III: The Gain and Basis Calculation

Part III is where the math happens, and the line numbers do not follow the order you might expect. The key lines, using the current Form 8824 instructions:⁷

Line 15: Boot Received

Add cash the other party paid you, the fair market value of any non-like-kind property you received, and any net debt relief (liabilities the other party assumed minus liabilities you assumed, cash you paid, and non-like-kind property you gave up). Subtract your exchange expenses. The result is total boot received.

Line 18: Your Total Investment

Add the adjusted basis of the like-kind property you gave up, any exchange expenses not already used to reduce Line 15, and any net amount you paid to the other party (excess liabilities you assumed over those they assumed, plus cash you paid).

Line 19: Realized Gain

Line 17 (fair market value of the like-kind property received, plus Line 15) minus Line 18. This is your total economic gain before deferral.¹

Line 20: Gain Triggered by Boot

The smaller of Line 15 or Line 19, but never less than zero. You recognize gain only to the extent of boot received, and never more than your realized gain.

Lines 21 Through 23: Recognized Gain

Line 21 is any ordinary income from depreciation recapture on Section 1245 or Section 1250 property. Line 22 is the remaining recognized gain after subtracting recapture, and that is the figure that flows to Form 4797 or Schedule D. Line 23 totals Lines 21 and 22.

Line 25: Basis of Replacement Property

Line 25 is your adjusted basis in the property you received. The formula is Line 18 plus Line 23, minus Line 15. That basis is lower than what you paid because it absorbs the deferred gain, and it follows the property for depreciation and any future sale.

Where Recognized Gain Gets Reported on Your Return

If you had boot and Line 22 of Form 8824 shows recognized gain, where it lands depends on the character of the relinquished property and how long you held it.

Investment Property Held More Than One Year

Recognized gain on investment property held more than a year is a long-term capital gain. Report it on Schedule D (Form 1040), where it flows to Line 11.⁸ Long-term rates of 0%, 15%, or 20% apply depending on income.

Business Property Held More Than One Year

Property used in a trade or business and held more than a year falls under IRC Section 1231.⁹ Report the gain on Form 4797, Line 5.⁷ Section 1231 gains combine with your other Section 1231 transactions on Form 4797; a net gain flows to Schedule D at long-term capital gains rates, while a net loss is treated as ordinary.

Depreciation Recapture

Part of a recognized gain can be unrecaptured Section 1250 gain tied to depreciation you claimed on the relinquished real property.¹⁰ It is taxed at a maximum rate of 25%. The recapture amount is calculated on Line 21 and reported separately so it receives the correct treatment.

File an Extension If Your 180 Days Cross April 15

The 180-day exchange period ends on whichever date comes first: 180 days after the transfer, or the due date of your return for that year (including extensions).³

If you sold the relinquished property after mid-October, your 180-day window runs past the following April 15. Without an extension, your exchange period is cut short at the filing deadline and you lose the days you would otherwise have. File Form 4868 for an automatic six-month extension before April 15, even if you have every number you need to file on time.¹¹

How to Report a Failed or Partial Exchange

Complete Failure

If you missed the 45-day identification deadline, failed to close within 180 days, or otherwise did not complete a qualifying exchange, the transaction is a straight sale. Do not file Form 8824. Report the sale on Schedule D (investment property) or Form 4797 (business property) and recognize the full gain in the year you transferred the relinquished property.

If you already filed for that year expecting the exchange to close, file Form 1040-X to amend.¹² Interest runs from the original due date, and a late-payment penalty may apply, so move quickly once you know the exchange has failed.

Partial Failure

A partial failure happens when the like-kind transfer closes but your qualified intermediary returns unused exchange funds after the deadline. That returned cash is boot. File Form 8824 because the exchange itself was valid, and add the returned funds to the boot on Line 15. The recognized gain on Line 20 rises accordingly and flows to Schedule D or Form 4797 like any other recognized gain.¹

More Than One Exchange in the Same Year

If you completed multiple like-kind exchanges during the tax year, you can file a single summary Form 8824 showing your name, identifying number, the word “Summary” on Line 1, total recognized gain on Line 23, and total basis on Line 25. Attach a separate statement for each exchange containing all the information Form 8824 normally requires, with your name and identifying number at the top of each page.⁷

State Reporting Is Separate

Not every state follows the federal rules on 1031 exchanges. Some require supplemental forms for exchanges that cross state lines, and several impose mandatory income tax withholding when a nonresident seller exchanges property located in that state. Check your state’s tax authority before assuming a clean federal filing finishes the job.

1
Internal Revenue Service. Form 8824 – Like-Kind Exchanges
2
Internal Revenue Service. Like-Kind Exchanges – Real Estate Tax Tips
3
Office of the Law Revision Counsel. 26 U.S. Code 1031 – Exchange of Real Property Held for Productive Use or Investment – Section: Requirement That Property Be Identified and That Exchange Be Completed Not More Than 180 Days After Transfer of Exchanged Property
4
Office of the Law Revision Counsel. 26 U.S. Code 1031 – Exchange of Real Property Held for Productive Use or Investment
5
Office of the Law Revision Counsel. 26 U.S. Code 267 – Losses, Expenses, and Interest With Respect to Transactions Between Related Taxpayers
6
Office of the Law Revision Counsel. 26 U.S. Code 1031 – Exchange of Real Property Held for Productive Use or Investment – Section: Special Rules for Exchanges Between Related Persons
7
Internal Revenue Service. Instructions for Form 8824
8
Internal Revenue Service. Schedule D (Form 1040) – Capital Gains and Losses
9
Office of the Law Revision Counsel. 26 U.S. Code 1231 – Property Used in the Trade or Business and Involuntary Conversions
10
Office of the Law Revision Counsel. 26 U.S. Code 1250 – Gain From Dispositions of Certain Depreciable Realty
11
Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
12
Internal Revenue Service. File an Amended Return