Last updated on January 4th, 2024 at 07:22 pm
Today I’m going to walk you through a 1031 Exchange form that you will be submitting to the IRS when you complete your Exchange.
And real quick, a 1031 Exchange is when you sell one investment property and buy another investment property with very specific rules and timelines.
This will enable you to defer your taxes, sometimes forever, and build generational wealth for your family, just like the big investors do.
HERE’S WHAT THE IRS SAYS ABOUT 1031 EXCHANGES:
1. 1031 Exchange – IRS Tax Form Explained (my explainer video on YouTube)
2. IRS Form 8824 Instructions: (PDF)
3. IRS Form 8824 to Download: (PDF)
In this video, we’ll be going over the form that your tax preparer will use to report your 1031 Exchange to the IRS. Note here, form number, they’re calling it Like-Kind exchanges because you are doing a Like-Kind Exchange and this is under 1031 of the IRS code. And these are the rules for 2022 for the current filing.
Several important things. I’m definitely not an accountant or a tax preparer, but I think it’s valuable for you to know in advance what things will be on the form that reports your 1031 Exchange. The first thing is it must be real property. Real property, Real property. The second thing is, you will report the description of the kind of property that you’ve given up.
In other words, the one you’ve sold. You’ll also describe the kind of property. And notice it says Like-Kind. And in another video we’ve talked about all the kinds of real property that are Like-Kind. So you’ll describe that. It might be an apartment house with three units that you’re receiving a condo for. Or something, you know, maybe a um, one house and receive another house, or you’ll sell an office building, receive a house. These are all Like-Kinds. You will also report when you have given up your property. Given up, of course means sold. The date you actually transferred your property to the other property. When did you close Escrow on your new property? The date the Like-Kind property you received was identified – important words – by written notice to another party, meaning your Qualified Intermediary.
And within the 45 days after you have sold this property. The date you actually received the property. Remember one was identified, one was received, that’s Closing. Also, there’s a question, was there a related party in this transaction, either directly or indirectly? This is really significant because many times I get a question: Can I sell my office building to my sister or my parent, or how could I sell half the office building to my parent or something like that?
Really understand this in advance because there’s definite requirements in case there’s a related party involved. Okay, and one of the things that I like on this form, Is there’s a section that says that you can establish to the satisfaction of the IRS that neither party in the Exchange nor the disposition had tax avoidance as one of their principle purposes if you have a relative involved,
There is a page two to this form where you talk about realized gains, recognized gains basis of your Like-Kind property received. We’re not going to go over that at this time. This is something that you go over with your accountant.
Here’s the instruction sheet for the form where you report your 1031 Exchange.
I’m definitely not an accountant, and this is something that you do go over with your accountant. There are some important reminders on this form, though. There’s a reminder that after. 2018, you could not use certain kinds of properties in a 1031 Exchange, and it had to be real property or in a trade or business.
Also that you could not use property that was held primarily for sale, or that you were flipping, that, if you were a, a builder, that kind of thing, and you’re flipping property. This is for investment property.
When to file. You need to file during the current tax year if you transferred your property to another party in a Like-Kind Exchange. And do it with your tax return this year.
Also, if it was exchanged with a related party, meaning a relative or a corporation that you own, two different corporations that you own, or two LLCs that you own, then you have to file the return for several years, two years after the year of sale.
Like-Kind exchanges. This is a reminder, in the IRS forms, that a Like-Kind Exchange and a 1031 Exchange are the same thing. There are a few other kinds of Like-Kind exchanges, but we’re not going to talk about those right now. Like-Kind Exchange here is a 1031 Exchange.
It talks a little bit about personal property in case you receive jewels, or a boat, or money, in your transaction. Some of that is taxable. Otherwise. It says there’s no gain or loss recognized if you receive Like-Kind.
A reminder again, that section 1031 does not apply to exchanges when you’re talking about property held primarily for sale. In other words, if you were a builder, and you accepted something for a down payment, that was perhaps another property, a boat, a car, money. It doesn’t apply, so it’s not tax deferred.
Again, definitions of real property and tangible property, like money.
The second page of the instructions, several things that I’ve noted here that I’d like to emphasize. Again, what’s a Like-Kind? What’s classified as Like-Kind? And what happens when it’s a deferred Exchange?
Almost all of the exchanges that we do are deferred, meaning they don’t happen at exactly the same moment. But remember, you must deal with timing requirements, for identification and receipt. So the property that you want to receive must be identified within 45 days after the property being given up as transferred. And that is of course, you’re going to tell your Qualified Intermediary, you’re going to identify it. And the replacement property must be received, meaning you must close Escrow on it within 180 days, or – this is really sort of significant here – by the due date of the tax return, including extensions, whichever is earlier. And this only applies to a few properties done by the end of a a tax year.
Again, always talk to your tax preparer, your accountant, and make sure that your timing works properly. And remember, Qualified Intermediary is talked about in the IRS form to be having a Like-Kind Exchange. If you fail to meet the timing requirements, then your transaction won’t qualify as a deferred Exchange, and the gain may be taxable in the year you transferred the property. Really significant.
Know in advance, so that you plan your timing.
This is on page three, and it’s probably the most significant to what we’ve been talking about. It’s property used as your personal residence. If a property given up [meaning the one you’re selling] was owned and used as your personal residence, [it says your home, but it means primary residence] for at least a total of two years during the five year period ending on the date of the Exchange, you may be able to exclude part of that Exchange. This is when you do a combination of your personal home and that you turned into an investment property.
We’ve talked about this in other videos.
So these are the forms that you may want to review before you start thinking about your Exchange. You have some definitions, you have timetables and you know, in advance before you start the Exchange, what your requirements are so that you can tell your accountant, follow them, and have your tax deferred.
Oh, and if we haven’t met, my name is Maxine Golden. I’m a longtime real estate broker, I started the 1031 Exchange Lady Channel because I believe you deserve the same tax breaks as the big investors.
And the law says you deserve them. but don’t just take my word for it. Ask the IRS ask your tax advisor. They will tell you the same thing.
So I specialize in helping property owners like yourself find Qualified real estate agents across America to help them with their 1031 exchanges. If you have any questions, ask me in the comments or book a call. I look forward to seeing you in the next video.