IRS Form 8824 is used to report an exchange of real property for real property of a like kind and to calculate how much of the gain is being deferred, the basis in the acquired property, and the taxable gain to be reported in the current year.
What is a Like-Kind Exchange?
A like-kind exchange occurs when an owner exchanges business or investment real property for similar property of a like kind, and under IRC section 1031 no gain or loss is recognized. Real properties are generally considered to be like-kind regardless of whether they are improved or unimproved, but they both must be located in the United States and the property must not be treated as inventory held for sale.
A like-kind exchange might also include not like-kind property, such as cash, liabilities, or personal property, and the gain (not the loss) on this property is recognized in the return. A tax return may include both deferred and recognized gain in the same transaction when a taxpayer exchanges for like-kind property of lesser value.
Who Qualifies for a Like-Kind Exchange?
Individuals, C corporations, S corporations, partnerships (general or limited), limited liability companies, trusts, and any other taxpaying entity may set up an exchange of business or investment property under section 1031.
What Qualifies as a Like-Kind Exchange?
The exchange of real property for the same kind of real property is the most common type of nontaxable exchange. To be a like-kind exchange, the real property traded and the real property received must be both a qualifying property and like-kind property. Both properties must meet certain requirements:
- Both properties must be held for use in a trade or business or for investment.
- Both properties must be similar. Like-kind properties are of the same nature, character, or class. Quality or grade does not matter. For example, property that is improved with a rental house is like-kind to vacant land as both are for investment purposes.
- An exchange is distinguished from simply selling one property and using the proceeds to purchase another property (which is considered a taxable transaction.)
- The disposition of property and the acquisition of replacement property must be mutually dependent parts of an integrated transaction. While the completion of the disposition and the acquisition do not necessarily occur at the same time, they must meet strict timelines and be mutually dependent.
These two kinds of property are also treated as real property for section 1031 purposes:
- Stock in a cooperative housing corporation.
- Shares in a mutual ditch, reservoir, or irrigation company described in section 501(c)(12)(A) if, at the time of the exchange, the shares were recognized by the highest court of the state in which the company was organized, or by a state statute, as constituting or representing real property or an interest in real property.
What is the Same Taxpayer Rule?
The taxpayer who owns the relinquished property mush be the same taxpayer who takes ownership of the replacement property, i.e., the same SSN or EIN on each side of the transaction. A change in the taxpayer identity between the two properties in the like-kind exchange does not qualify. This includes a taxpayer relinquishing property and adding a spouse to acquired property.
What are date restrictions to a Like-Kind Exchange?
There are two separate date requirements:
(1) There is a 45-day written notification requirement, including taxpayer’s signature which must stipulate:
- The property being received must be identified and designated as replacement property.
- Real property should be described using a legal description, street address, or distinguishable name.
- The taxpayer may identify up to 3 potential properties.
- The document must be signed by all parties in the exchange.
- The signed document is sent to a designated facilitator (either mailed, faxed, or delivered.)
- If exchange is fully completed within 45 days, it is considered to have met the written notification requirement.
(2) The property must be received by the earlier of the following dates.
- The 180th day after the date the taxpayer transferred the property given up in the exchange.
- The due date (including extensions) of the tax return for the year in which they transferred the property given up.
What Constitutes a Related Party?
Special rules apply to exchanges between related parties. If the exchange is being structured to avoid related-party rules, it is not a like-kind exchange and should not be reported on Form 8824 but instead should be treated as a sale. (See 26 U.S.C. § 267(b) for the definition of a related party.) Related Parties include:
- Family Relationship such as a spouse, child, grandchild, parent, grandparent, brother, sister.
- A related corporation, S corporation, partnership, trust, estate, or tax-exempt organization.
Reporting a like-kind exchange in TaxSlayer Pro
Note: When disposing of real property in the depreciation module, you will be asked "Carry Disposition to Form 4797?". Answer No. The gain or loss, if any, will instead flow to Form 4797 from Form 8824.
To enter a like-kind exchange in TaxSlayer Pro, from the Main Menu of the tax return (Form 1040) select:
- Income
- Other Gains/Loss (4797, 8824)
- Form 8824 - Like-Kind Exchanges - Click New.
Part I - Information on the Like-Kind Exchange
- Description of Property Given Up
- Description of Property Received - Generally only real property needs a description, including the address and type of property, but also describe property being disposed of that was part of a previously reported related party like-kind exchange.
- Property Given Up Originally Acquired - This is the acquisition date of the property given up.
- Property Transferred to Other Party - This is the date the property given up was transferred to the other party.
- Property Received was Identified - This is the date of the written identification of the like-kind property the taxpayer received. If the taxpayer received the property before the end of the 45-day written identification requirement period, enter the date they received the replacement property.
-
Property Received from Other Party - This is the date the taxpayer received the like-kind property from the other party. The property must be received by the earlier of:
- The 180th day after the date the taxpayer transferred the property given up in the exchange.
- The due date (including extensions) of the tax return for the year in which the taxpayer transferred the property given up.
- Exchange Made with a Related Party, Either Directly or Indirectly - If the parties are related, check this check box.
Part II - Related Party Questions - If the parties to the exchange are related, provide information about the related party and answer the remaining two Yes/No questions:
- Related Party Sold or Disposed of Property Received from You
- You Sold or Disposed of the Like-Kind Property You Received
If the answer to both of the questions is No and this is not the year of exchange, the remainder of the form does not need to be completed.
If the answer to either of the questions is Yes and there is an exception to the related party rules, select Disposition Exception and indicate which exception applies. If the third exception applies, Disposition Did Not have Tax Avoidance as its Principal Purpose, be sure to attach a statement to the return with an explanation.
Part III - Realized Gain or (Loss), Recognized Gain, and Basis of Like-Kind Property Received
- FMV or Other Not Like-Kind Property Given Up- If the taxpayer also pays out cash, or gives up other property that is not like-kind, the FMV value is entered here.
- Adjusted Basis of Not Like-Kind Property Given Up - Enter the book value of the not like-kind property (cost basis less accumulated depreciation).
- Cash & FMV of Other (Not Like-Kind) Prop Received - The value entered will represent the amount of cash ("boot") and other property the taxpayer received separate from the like-kind property they received. If the property given up is subject to a debt (or liability) and the other party involved in the exchange is assuming the debt, this debt is also treated as boot. If the the two parties each assume the other's debt, the taxpayer is only treated as receiving boot by the amount the debt they gave up exceeds the debt they took on. There are specific guidelines of when to include liabilities assumed by the other party - see the Form 8824 instructions for more info.
- Other Property Received Description - If you entered an amount on the previous line, describe the property received here.
- FMV of Like-Kind Property You Received- This value is the purchase price of the property the taxpayer received.
- Adjusted Basis of Like-Kind Property You Gave up - The cost of the property the taxpayer gave up less accumulated depreciation.
- Ordinary Income Under Recapture Rules - If there is a realized gain and the taxpayer disposed of section 1245, 1250, 1252, 1254, or 1255 property, they may be required to recapture as ordinary income part or all of the realized gain. See the Form 8824 instructions for this line for more info as well as Publication 544 for more detailed info.
- Basis of Section 1250, 1245 or Intangible Property Received - Enter the basis of the like-kind property received in the appropriate field, whether section 1250, section 1245, or intangible property.
- Send Income to - Select the appropriate form to carry the income:
- Schedule D - Non-business property.
- Form 4797 - Business property.
- Form 6252 - Installment sale.
- Taxpayer, Spouse or Joint? - For a return filing MFJ, indicate who the form belongs to.
Note: This is a guide on entering a like-kind exchange into the TaxSlayer Pro program. This is not intended as tax advice. The Form 8824 instructions and IRS publications are invaluable and authoritative resources.
Additional Information:
IRS: Instructions for Form 8824, Like-Kind Exchanges (and section 1043 conflict-of-interest sales)
IRS: Publication 544, Sales and Other Dispositions of Assets