Last updated on July 8th, 2024 at 06:53 pm
Right now, I’m going to show you an overview of the Form 8824, which is the form that you will submit to the IRS when you do a 1031 Exchange.
HERE’S THE PROBLEM
The IRS requires that you submit this form in the year you sell your first property in the exchange. You can’t wait on this. It has to be in that tax year. So, it’s really valuable for you to learn about this form.
Real quick, a 1031 Exchange is when you sell one rental property and buy another rental property according to the IRS timelines and rules. This enables you to defer, sometimes forever, all the taxes that you would have made on your gain to build generational wealth for your family just like the big boys do.
IRS FORM 8824 FOR 1031 EXCHANGES
In this video, I’m going to introduce you to the form 8824. 8824 is the form that you and/or your accountant will submit with your tax return in the year that you complete your 1031 Exchange.
CHANGES FOR 2023
Notice for 2023, there’s several new items on the form.
So it’s changed from last year. I will go over this on the form itself. But be aware of this, that the IRS gives you instructions, if you want to read them, go ahead, if not, hand it to your accountant.
LIKE-KIND PROPERTIES
And the new changes will be relating to property that is not “like-kind,” meaning it’s not real estate. And they’re so concerned about properties that are not “like-kind,” meaning that they’re not land or real estate related, that they added these sections.
REAL PROPERTY
They then remind you again that we’re limited to “real property,” and that this law came into existence in 2018. There were many more items that you could exchange prior to that tax law.
It may seem obvious, but the purpose of this form is to show you how you report the exchange of real estate or property used in your business or investment.
This is a reminder that you must file during the current tax year. when you transferred your property.
You can’t wait till the loans paid off. You can’t wait till next year.
Here’s a little bit of a reminder on the regulations.
They go ahead and define real property and it isn’t always real estate. Sometimes what they’re calling it is unsevered natural products of the land. So they’ve defined real property for you.
In their definition of real property, and remember you can only exchange real property in a 1031 Exchange, they define it as land and improvements to land, unsevered natural products of the land, This may mean oil leases, and water and air spaces adjacent to the land.
So “superadjacent” means above. I don’t know why they use that word, but that’s what they say. So remember, it’s not just land or land and buildings.
DEFERRED EXCHANGES
These instructions talk about deferred exchanges, and that’s when there is an agreement on a property and you don’t do it at exactly the same moment. Most of our exchanges are not exactly at the same moment but there’s definite timetables and rules from the IRS. And using a Qualified Intermediary is very important otherwise you don’t have an exchange.
1031 EXCHANGES WITHN RELATIVES
They also mention exchange with a related party, and property used partly as a home, meaning your home, your office, that kind of thing.
HOW TO DESIGNATE YOUR PROPERTY
And then there’s a reminder of exactly how you have to designate your property. That you designated in writing, signed by all the parties, and that’s how you give your 45-day written identification to your Qualified Intermediary.
DESCRIBING THE PROPERTY
It has to be clear and recognizable. Meaning, you can’t say a property in the corner lot on Smith Street. You have to define it clearly so that anybody looking from the outside would know what property it was.
SPECIAL RULES
Then they remind you that there are special rules when you exchange in a like-kind exchange with related parties. And related parties are either directly or indirectly a spouse, a child, a grandchild, a parent, a grandparent, brother, sister, or a related corporation.
RECORD KEEPING
The next item isn’t super important, but I love it, and I think you should be aware of it, because it could affect how you act. It says that the IRS believes that it will take you 11 hours and 43 minutes for your record keeping. I don’t know where they get the 43 minutes or the 11 hours, but be aware it takes a while for your record keeping, and it might be over several years.
Learning about the law or the form, two hours and 34 minutes. Again, very interesting, those numbers. And for you to prepare the form, two hours and 53 minutes. This is actually in the instructions, page six, so look at it if you want to get a laugh. And that reminds us, maybe this should go to your accountant.
FORM 8824
Here’s the actual form, 8824. For each year, it’s a little bit different. Remember that you have to describe the property given up, carefully describe, and describe the property that you received.
DATES ARE IMPORTANT
Dates are super important so you have to say when you’ve actually transferred the property. And what’s interesting on number five, and this has confused a lot of people, including me, so you need to get advice on this. The date the like property you received was identified by written notice to another party.
QUALIFIED INTERMEDIARY
Now “another party” seems to mean the Qualified Intermediary, but ask your accountant.
THE OTHER PARTY
And then. The actual date that you received the like-kind property. Now it’s not another party, it’s the other party. So does that mean the seller of the property you’re acquiring or does that mean that you received it from the Qualified Intermediary? I don’t know the answer and maybe your accountant, each of the accountants might have a different opinion.
Okay, remember I just said that related party has different rules. They want to know that. on your form. Was it the related party? And then,
if you acquired it from a related party, there’s different rules on how long you can keep it.
NOT TAX AVOIDANCE
The one section that I also love is number 11. You have to check a box that says, you can establish to the satisfaction of the IRS that neither the exchange nor the disposition had tax considerations of an avoidance as one of the principal purposes. Again, neither the exchange nor the disposition had tax avoidance as one of the principal purposes.
Don’t cheat, okay?
NON LIKE-KIND PROPERTIES
The second page, where they said the changes for this year, for the year 2023, notice the 12A, the 15A,
the 25A. These are related to non like-kind properties, as they described in the original instructions. So, get some help on this. And for number 24, it’s really important to understand what your deferred gain is in an exchange because that will affect the basis in the property you receive.
MAXINE GOLDEN
Oh, and if we haven’t met, my name is Maxine Golden. I’m a long time real estate broker, and I started the 1031 Exchange Lady channel because I believe that you deserve the same tax breaks as the big investors. The law says you do, and you do, but don’t just take my word for it. Ask your accountant or ask the IRS. They will tell you the same thing. So, I specialize in helping rental property owners like yourself defer taxes when they sell one property and buy another one. We do this across America. Sometimes I will help you directly and sometimes I will help you choose a qualified, experienced agent who understands a 1031 Exchange. So, you can ask me questions in the comments or see below to book a call. I look forward to seeing you in the next video.