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

You report a 1031 exchange on your tax return by filing IRS Form 8824 with the return for the year you transferred the relinquished property. The form identifies both properties, calculates how much of your gain is deferred versus recognized now, and fixes the tax basis of the replacement property. Any gain you have to recognize because you received cash or other non-like-kind value flows from Form 8824 to Schedule D or Form 4797, depending on how the property was used. You file Form 8824 even if you defer the entire gain and owe nothing extra.¹

What You Need Before You Start Form 8824

Pull your records together before you open the form. Every line depends on numbers you should already have in your closing documents and prior depreciation schedules.

The Two Transfer Dates

Record the exact date you transferred the relinquished property to the buyer and the exact date you received the replacement property. The IRS checks those dates against the 45-day identification deadline and the 180-day closing deadline (or the due date of your return, including extensions, if that falls first).² Your closing statements are the cleanest source. The dates on Form 8824 must match them.

Adjusted Basis of the Relinquished Property

Adjusted basis is your original purchase price, plus capital improvements, minus all depreciation you claimed or were entitled to claim. Your prior Form 4562 filings should give you cumulative depreciation. This number anchors the whole gain calculation.

Fair Market Value of Both Properties

Document the fair market value of the relinquished property (generally the gross selling price) and the replacement property (its gross purchase price). These values determine whether you came out even or ended up with boot.

Boot

Boot is any cash or non-like-kind property you received in the exchange, and it triggers immediate gain recognition.³ Net mortgage relief counts too. If the buyer took over a $500,000 mortgage and you only assumed $350,000 on the replacement property, the $150,000 difference is boot. New debt you assumed or additional cash you contributed 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 before midnight on day 45 to the qualified intermediary or another party involved in the exchange (not to you or your agent). Keep a copy with your tax records. The IRS may ask for it.

Filling Out Form 8824

The form has three parts. Part I and Part II are mostly descriptive. Part III is the math, and the line numbers do not follow the sequence most people expect.⁴

Part I: Describing the Properties

Part I asks for a description of the property you gave up and the property you received, plus the transfer dates for each. Use a plain description and street address rather than just a legal description. The dates here are what the IRS will measure the 45-day and 180-day windows against, so copy them from your closing statements.¹

Part II: Related Party Exchanges

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

If a related party was involved, a two-year holding clock starts. If either side disposes of the exchanged property within two years, the deferred gain snaps back into taxable income as of the disposition date.⁶ Limited exceptions apply for death, involuntary conversion, or dispositions the IRS accepts were not tax-motivated, but the default is strict.

Part III, Line 15: Boot Received

Line 15 totals the non-like-kind value you received. Add cash the other party paid you, the fair market value of any non-like-kind property, and any net debt relief (liabilities assumed by the other party in excess of liabilities you assumed, cash you paid, and non-like-kind property you gave up). Subtract your exchange expenses. The result is total boot received.⁴

Part III, Line 18: Your Total Investment

Line 18 adds the adjusted basis of the property you gave up, any exchange expenses not already used on Line 15, and any net amount you paid to the other party (excess liabilities you assumed over theirs, plus cash you paid).

Part III, Line 19: Realized Gain

Line 19 is the realized gain or loss. It equals Line 17 (fair market value of the like-kind property received, plus Line 15) minus Line 18. This is your full economic gain before any deferral.¹

Part III, Line 20: Gain Triggered by Boot

Line 20 is the smaller of Line 15 or Line 19, but never less than zero. You recognize gain only up to the boot received, and never more than your total realized gain.⁴

Part III, Lines 21–23: Recognized Gain

Line 21 captures any ordinary income from depreciation recapture on Section 1245 or Section 1250 property. Line 22 is the recognized gain after the recapture piece and is the figure that moves to Form 4797 (business property) or Schedule D (investment capital assets). Line 23 totals Lines 21 and 22.⁴

Part III, Line 25: Basis of Replacement Property

Line 25 gives you the adjusted basis of the property you received. It is lower than what you paid, because it absorbs the deferred gain. The formula is Line 18 plus Line 23, minus Line 15. In practical terms, your new basis equals the replacement property’s cost minus the gain you deferred.¹

Where Recognized Gain Goes on Your Return

If Line 22 shows recognized gain, where it lands depends on how the property was used and how long you held it.

Investment Property Held More Than a Year

If you held the relinquished property for investment (a rental you managed passively, for example) for more than one year, the recognized gain is a long-term capital gain. Report it on Schedule D (Form 1040), where it flows to Line 11.⁷ Long-term rates are 0%, 15%, or 20% depending on your income.

Business Property Held More Than a Year

If the property was used in a trade or business and held more than a year, the gain falls under IRC Section 1231.⁸ Report it on Form 4797, Line 5, as the Form 8824 instructions direct.⁴ 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, and a net loss is treated as an ordinary loss.

Depreciation Recapture

Part of the recognized gain may be unrecaptured Section 1250 gain, tied to depreciation you previously claimed on the relinquished real property.⁹ It is taxed at a maximum rate of 25%, higher than standard long-term capital gains but below ordinary income rates. The recapture amount is calculated on Line 21 and reported separately so it receives the correct rate. For most real property placed in service after 1986 (straight-line depreciation), the 25% rate applies to the full amount of prior depreciation.

How Closing Costs Change the Numbers

Transaction fees affect your gain calculation, and the treatment depends on which side of the exchange they sit on.

On the relinquished property side, broker commissions, transfer taxes, recording fees, title company fees, qualified intermediary fees, and direct legal costs reduce the boot amount on Line 15. Lower boot means less recognized gain. On the replacement property side, broker commissions and intermediary fees increase your basis in the replacement property instead of reducing boot.

Loan-related costs are different. Origination fees, points, and lender-required appraisals are costs of obtaining financing, not costs of the exchange itself. Paying them from exchange funds can create taxable boot. If you are financing the replacement property, arrange for loan costs to be paid from separate funds outside the exchange escrow when you can.

What Line 25 Means Going Forward

The basis on Line 25 follows you for as long as you hold the replacement property. It becomes the starting point for depreciation on Form 4562.¹⁰

Because deferred gain reduces your basis, your annual depreciation deduction is lower than if you had bought the property outright. For nonresidential real property depreciated over 39 years using the straight-line method, a $200,000 basis reduction from deferred gain costs you roughly $5,128 per year in lost depreciation. When you later sell the replacement property in a taxable transaction, that lower basis produces a larger taxable gain. The IRS language of “deferred, not forgiven” is literal.¹¹

Filing Scenarios That Change the Approach

Extend Your Return if the 180 Days Cross April 15

The 180-day exchange period ends on whichever date comes first: 180 days after your transfer, or the due date (including extensions) of your return for the year of the transfer.² If you sold after mid-October, your 180-day window runs past the next April 15. File Form 4868 for an automatic six-month extension before April 15, even if you expect to be ready to file on time. The extension costs nothing and preserves the full exchange period.¹¹

Failed Exchange

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 that year’s return expecting the exchange to go through, file an amended return on Form 1040-X.¹² You will owe interest on the unpaid tax from the original due date, and possibly a late-payment penalty. The sooner you amend, the less interest accrues.

Partial Failure

If the like-kind transfer went through but your qualified intermediary returned unused exchange funds after the deadline, that leftover cash is boot. You still file Form 8824 because the exchange itself was valid. The returned funds appear on Line 15, Line 20 increases accordingly, and the additional recognized gain flows to Schedule D or Form 4797 like any other recognized gain.¹ The like-kind portion still qualifies for deferral.

Multiple Exchanges in the Same Year

If you completed more than one like-kind exchange during the year, file a single summary Form 8824 with 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 individual exchange showing all the information Form 8824 normally requires, with your name and identifying number at the top of each page.⁴

State Reporting

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

1
Internal Revenue Service. Form 8824 – Like-Kind Exchanges
2
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
3
Office of the Law Revision Counsel. 26 U.S. Code 1031 – Exchange of Real Property Held for Productive Use or Investment
4
Internal Revenue Service. Instructions for Form 8824
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. Schedule D (Form 1040) – Capital Gains and Losses
8
Office of the Law Revision Counsel. 26 U.S. Code 1231 – Property Used in the Trade or Business and Involuntary Conversions
9
Office of the Law Revision Counsel. 26 U.S. Code 1250 – Gain From Dispositions of Certain Depreciable Realty
10
Internal Revenue Service. Form 4562 – Depreciation and Amortization
11
Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
12
Internal Revenue Service. File an Amended Return