This GuideBook was written by the 1031 Exchange Experts’ llc to help clients sort through the complexities of reporting 1031 exchanges. Following this system of examples and WorkSheets should assist even those most unfamiliar with U.S. tax law to properly prepare the tax forms required to report their exchanges.
We, the 1031 Exchange Experts’ llc, are a nationwide Qualified Intermediary specializing in the handling of 1031 exchanges. While the information here was created to give guidance to our clients in the reporting of their exchanges, no one knows your specific tax situation better than your own tax advisor. Please follow their advice. Do not use this booklet as a substitute for legal or financial advice. This book has been prepared exclusively for the clients of 1031 Exchange Experts’ llc and may not be used by others without written permission.
hen you chose the 1031 Exchange Experts’ llc, we promised
the highest level of service before, during and even after your
exchange. Now that you’ve successfully completed your exchange we’re keeping that
promise. We proudly present 1031TaxPak™, an easy-to-follow guide to help you report
your exchange.
T hough your exchange may be complete, there still remains the final step of reporting
your exchange to the IRS. In tax-filing season, you may be wondering what exactly
you’re supposed to do next. With 1031TaxPak, we’re here to guide you through the process.
Reporting your exchange can be confusing, but it doesn’t have to be a nightmare. The tax
forms you must submit are not very self-explanatory; the IRS typically uses archaic language
and their instructions can be more confusing than helpful. Finding the numbers you need to
fill in the forms can be guesswork if you’re not a tax professional.
We created 1031TaxPak to help you overcome these obstacles.
It’s designed to help you do two things: 1) understand the
concepts and terminology in plain, simple English, and
2) help you find the resources you need to correctly report
your exchange. We hope you find 1031TaxPak helpful,
educational and time-saving.
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How to use 1031TaxPakTaxPak is an extension of the service we provide throughout the life of your exchange. For those of you who prepare your own tax returns, the exchange reporting process may be unfamiliar territory. Aside from Gary Gorman’s best-selling 1031 book, Exchanging Up! (ISBN 0974684465), published guidance on the subject is scarce. By working through our examples and WorkSheets, you’ll be able to identify and calculate the important figures for your 1031 exchange. With TaxPak as your guide, the IRS forms will make more sense!
If you hire a professional to prepare your tax returns, you are welcome to give them your copy of TaxPak. Either way, we should highlight one key point: As your Qualified Intermediary for this 1031 transaction, BY LAW we cannot be your personal tax advisor. 1031TaxPak assists you with the exchange process, but it is not a substitute for tax or legal advice. Even though we are recognized throughout the world as Experts when it comes to 1031 exchanges, we don’t pretend to be experts on your finances or your personal tax history to provide such specific advice. 1031TaxPak is NOT a substitute for professional advisors who are trained and licensed to provide you with specialized assistance. If you need legal or tax advice, or help preparing your taxes, consult your personal tax or legal advisor.
Your PAKing List:In your 1031TaxPak email, you should find the following items:
Exchange Materials: For your convenience, we provide you with PDF copies of docu-ments you’ll need, including:
Closing Statements from your property sales and purchases,
A copy of your Exchange Account Statement, showing the account history of the exchange funds we held for you,
Your 45-Day Identification Form for identifying your New Property. If you com-pleted your exchange WITHIN 45 days of selling your Old Property, you were not required to submit this form. (If this is you, your TaxPak will not have this 45-Day Identification Form, nor will you need one),
Call The 1031 Experts toll-free at 866-694-0204
1031TaxPak GuideBook [Pcheck! this is it ] – The PDF GuideBook you are now reading is a road map to Form 8824 – and much more. TaxPak clarifies what Form 8824 is asking for, where to find the information, and explains the concepts you need to successfully report your exchange. This GuideBook works through a sam-ple exchange, step-by-step, so that you can follow along with your own exchange. It also includes supplementary material for specialized situations.
1031TaxPak WorkSheets: We designed a set of WorkSheets to help you with important calculations, such as those illustrated in the GuideBook’s sample exchange. The WorkSheets are NOT part of Form 8824, so don’t sub-mit them with your return. You can either destroy them or file the completed WorkSheets with your records.
IRS Form 8824: This is the official 2-page form you submit with your federal tax return to report the details of your 1031 exchange. You may be required to submit additional tax forms and calculations that relate to your exchange, but 8824 is the only form used for reporting the exchange itself.
And finally: access to 1031TaxPak.com, where you can download spare, fresh or additional copies of these PDFs. The IRS instructions for Form 8824 are also available on the TaxPak web site.
Keeping it Simple...To avoid over-complicating TaxPak, we’ve only focused on just the most common issues. Throughout the GuideBook, you’ll find references to supplemental material available at 1031TaxPak.com for rarer, more specialized situations.
You may also find useful guidance on our general website. Expert1031.com is a wealth of 1031 exchange information, including articles on specific topics relating to 1031 exchanges. You can use our “Ask an Expert” button to submit questions to the Experts online, or you can email questions to [email protected].
And of course, we’re available by phone to answer your questions as they arise. Don’t hesi-tate to contact us nationwide, toll-free, at 866-694-0204 if you have a question that needs an answer right away.
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Preparing Form 8824Let’s get started. The starting point for reporting a 1031 exchange is Form 8824, titled: Like-Kind Exchanges. When referring to real estate, the term like-kind is very broad, and includes any real estate held for investment or productive use in a business. For example: in
‘1031-land,’ a rental house is like-kind to, or ‘the same as’:
• a warehouse • a restaurant • bare land • an office building (etc.)
You may also need to file other forms with your tax return related to your investment property, which we discuss later.
You file Form 8824 with your tax return for the year you SOLD or transferred property in an exchange, regardless of when you purchased the New Property.
For example: if you sold a property on December 19, 2017 as part of a 1031 exchange, and you purchased the New Property on March 9, 2018, you would file Form 8824 with your 2017 tax return.
Form 8824 is divided into four parts:
Part I Information on the Like-Kind Exchange
Part II Related Party Exchange Information
Part III Realized Gain or (Loss), Recognized Gain, and Basis of Like- Kind Property Received
Part IV of Form 8824 isn’t relevant to §1031, so we don’t cover it here. (It deals with Deferral of Gain from Section 1043 Conflict-of-Interest Sales.)
Like-Kind – A broad
term for real property
that includes any
property held for
investment, or for
productive use in a
business.
Completing Part I – Information on the Like-Kind Exchange
Lines 1 and 2. Here you report the address and type of property for both the Old Property and New Property. If you had more than one exchange during the year, you can report all of them on one form and attach a supporting schedule with the information needed for each property and exchange. If you do this, you can write: see attached schedule on each line. However, we believe it is easier to prepare a separate 8824 Form for each exchange. You can download more forms at 1031TaxPak.com.
Line 3. Enter the date you originally acquired the Old Property that was sold in this exchange.
Line 4. Enter the date that you SOLD your Old Property. The date of closing can be found on your Closing Statements.
Line 5. Here you enter the date you filed your 45-Day Identification Form with us, the 1031 Exchange Experts’ llc, your Qualified Intermediary. This is the form where you listed the properties you considered purchasing. If you closed on the purchase of your New Property within 45 days of your sale, then you didn’t need this form. If that’s the case, then you
“identified” your New Property simply by buying it. If so, just put the closing date of the purchase of the New Property on Line 5.
Line 6. The date you closed on the purchase of the New Property you received in your exchange.
Completing Part II – Related Party Exchange Information
Lines 8-11. Part II is completed only if you sold prop-erty to a relative and/or acquired the New Property from a relative.
45-Day Identification Form
– The form provided by your
QI that is used to identify your
New Property. If completed and
returned to us, your 45-Day
Identification Form is included
in your 1031TaxPak.
Qualified Intermediary
(QI) – The 1031 exchange
professional that prepared the
legal documents and held your
proceeds for your exchange.
In this case, your Qualified
Intermediary is us, the 1031
Exchange Experts’ llc.
Old Property – Sometimes called the relinquished
property, or the ‘like-kind property given up.’
New Property – also called the acquisition or
replacement property. The tax forms call it ‘the like-
kind property received.’
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If there are no related parties involved in the transaction, you can ignore lines 8-11.
For purposes of a 1031 exchange, a related party would include your spouse, brothers, sisters, parents, children, grandparents or grandchildren. Related parties also include any corporation, S corp., partnership, LLC, or trust in which you AND/OR any other related party own more than a combined 50% interest. Section 1031(f) of the Internal Revenue Code discusses this in detail.
It’s important for you to know that special rules apply if your exchange includes relatives. As part of these special rules, Lines 8-11 of Form 8824 require you to provide additional details about the particular facts of your exchange. Also, if you involve a related party in a 1031 exchange, you must file Form 8824 for the two years following the exchange. See Lines 9 and 10 of the form.
Completing Part III – Realized Gain,
Recognized Gain and Basis of New Property
Part III is the most important and most difficult part of Form 8824. It’s used to report several pieces of information that are critical to your exchange, including the realized gain, recog-nized gain, (defined on page 8) and basis (page 10) of the property received in your exchange. Aside from this, it would be nearly impossible to clearly summarize the information you’ll com-pile for Part III. Instead, this GuideBook shows you how to complete Part III by working through a step-by-step example. Our example uses the same WorkSheets provided in TaxPak to show you how to do the calculations. This example begins at the bottom of page 8.
Lines 12, 13, and 14. These lines report any ordinary gain or loss on other property (i.e. non like-kind property) included in your exchange. In most cases, “other property” means things other than real estate. For example, if you sold a rental house in an exchange, and it includ-ed the value of a car stored in the garage, you would calculate the gain (or loss) on the sale of the car on these lines. If there was no
Other Property – Any property other
than the real estate that is included in an
exchange. For example, if a car was included
as part of the sale of your Old Property, then
it’s considered “other property.” Selling other
property in an exchange requires filling out
lines 12-14 on Form 8824.
Related Party – If your Old
Property buyer or New Property
seller is “related” to you, more
restrictive rules apply, and you
will need to complete lines 8-11
on Form 8824. The IRS does
this to make sure the parties
involved are not improperly
avoiding taxes.
other property other than real estate involved in your exchange, skip to Line 15 and start Part III there.
Lines 15 through 25. Here you will compute the realized gain and recognized gain associated with your sale
of the property and the basis of the property you received. In tax terms, Realized gain is the actual profit that you made on your property sale. Recognized gain is the amount of realized gain you pay taxes on this year. “Basis” refers to the amount of investment in your property for tax purposes and is discussed later. To make the calculations, you can use the WorkSheets provided with 1031TaxPak. In the following TaxPak Example we will work through the WorkSheets with you. Complete the WorkSheets before you start Line 15 of Form 8824.
Lines 21 and 22. These lines provide instructions on how to calculate ordinary income result-ing from depreciation recapture. You do not recapture depreciation from your
Old Property if the New Property is also depreciable. If the value of the New Property is more than the Old Property, then no depreciation will be recaptured. This concept and the calcula-tions are discussed in the concluding Buy-Down adjustment box on page 18.
Multi-Asset Exchanges. A multi-asset exchange is only reported if you sold and received more than one group of like-kind properties. For example, if you exchanged a hotel/restau-rant for another hotel/restaurant, your exchange involves exchanging the land and building (one ‘group’ = real estate) as well as furniture, kitchen equipment, etc. (another ‘group’ = personal property). Very few exchanges are multi-asset exchanges, but they involve special reporting rules. If you have questions about this, call us nationwide, toll-free at 866-694-0204.
Using the TaxPak ExampleNow let’s crunch some numbers! To illustrate Part III of Form 8824, we’ve included an example exchange that will make these concepts more understandable.
Realized Gain – The actual increase in the investment value of your Old Property during the time that you owned it.
Recognized Gain – The amount of the realized gain that you are not rolling forward into your New Property. This is the amount that is taxable for the current year.
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Let’s start with a fairly straight-forward 1031 exchange where a taxpayer sells a property and purchases a new one at a higher price. We call this buying up. The example that fol-
lows is a buy-up.
Illustrations of sample WorkSheets are included so you can see actual calcula-tions in-progress. Your 1031TaxPak includes blank WorkSheets for your actual numbers in your exchange. The individual WorkSheets flow together into larger calculations, so they are most helpful when completed in order.
Buy-Down Adjustment
If you bought down, modify these two details of the transaction above to create a ‘buy-down’ example:
New Property: Purchase price on 03/09/2018 = $80,000 New loan = $40,000
Buy-Down Adjustment
NOTE: If you “Bought Down” (your New Property was less than your old one), pay attention to these Buy-Down Adjustment boxes throughout the example. They show you formula differences in a buy-down and adjust the example to illustrate a buy-down situation. If you bought UP like most exchangers, ignore these blue boxes. If you bought down, you can also download this entire example as a Buy-Down at 1031TaxPak.com.
Purchase price on 01/10/2005 = $47,000 Capital improvements = $3,000 Depreciation = $18,456 Sale price on 12/19/2017 = $100,000 Outstanding mortgage = $40,000 Closing costs = $10,000 Exchange proceeds = $50,000Exchange proceeds = sale price: $100,000; minus closing costs:
$10,000; minus mortgage payoff: $40,000 = $50,000.
Purchase price on 03/09/2018 = $125,000 Exchange proceeds used = $50,000 New loan = $75,000 Closing costs = $2,000 Identification date = February 02, 2018
1031TaxPak ExampleOn December 19, 2017, Fred and Sue Jones sold a rental house in Vail, CO, for $100,000. They originally bought this house on January 10, 2005 for $47,000, and spent $3,000 remodeling it in 2007. They have taken $18,456 in depreciation. They still owe $40,000 on this house. They did a 1031 exchange, and on March 9, 2018 they closed on the purchase of their new rental house in Naples, FL, for $125,000. They used the proceeds held by the 1031 Exchange Experts’ llc for their exchange, and got a new loan for $75,000. Fred and Sue had $10,000 of closing costs
(real estate commissions, title insurance, etc.) on the sale of their Old Property, and $2,000 of closing costs on the purchase of their New Property. Their New Property was identified to the 1031 Experts on February 02, 2018.
New Property
New Property rental house
222 Second Street,Naples, FL
Old Property
Old Property rental house
111 First Street, Vail, CO
Buying Up – When
the New Property has
a purchase price that
is higher than the
sale price of your Old
Property.
Buying Down – just
the opposite: when the
New Property has a
purchase price lower
than the sale price of
your Old Property.
WorkSheet #1 Calculating the Basis of the Old Property.
To begin, you first need to determine the basis of the Old Property — the starting point for calculating the gain from the sale of your Old Property. The first component of the basis is the original cost of your Old Property. In order to calculate the adjusted basis, items like capital improvements increase the basis and depreciation decreases the basis.
WorkSheet #1 is used to determine the adjusted basis of the Old Property. IRS Publication 551 dis-cusses basis calculations in more detail. You can down-load this publication at 1031TaxPak.com
Basis – The amount you
invested in the property for
tax purposes.
Adjusted Basis – The basis
of your property adjusted for
items, like depreciation and
capital improvements.
[see next box]
Capital Improvements – Additions or replacing parts of the property
that add to its value. These improvements lengthen the time you
can use it, or adapt it for different uses. For example, replacing and
upgrading windows, or changing a warehouse into an office space.
Depreciation – An annual income tax deduction that allows you to
recover the cost or other basis of certain property over the time you
use the property. It’s an allowance for wear and tear and deterioration
of the property.
3,000
18,456
47,000
3,000
18,456
31,544
WorkSheet #1 - no adjustment
Buy-Down Adjustment
10
Example
11
WorkSheet #2 Calculating the Exchange Expenses.
The next step is to compile your exchange expenses, the costs of selling your Old Property and buying the New Property. To
find these costs, look at the closing summary or closing statement from both the Old Property sale and the New Property purchase.
WorkSheet #2 is used to gather and calculate the exchange expenses. If you have a Closing Disclosure as your final closing statement, look for the exchange expenses on pages 2 and 3.
Some expenses are not considered “exchange expenses.” The expenses not included as exchange expenses are in Table 1 - Allocation of Settlement Costs on our site at 1031TaxPak.com
Exchange Expenses
– The closing costs
incurred in a 1031
exchange to sell the
Old Property and buy
the New Property. For
example: real estate
commissions, legal fees,
title insurance, etc.
Closing Statement – The
document that outlines the
flow of money in a real estate
closing. It begins with the sale/
purchase price, then lists all
the expenses and credits for
the buyer and seller.
6,0001,000
1,000500
450500
50500
1,000
500
500
10,000
2,000
12,000
WorkSheet #2 - no adjustment
Buy-Down Adjustment
WorkSheet #3Basic Fact Gathering on the Old Property.
Now with the complicated calculations out of the way we’re ready for some basic fact gathering. These facts will be used to prepare Form 8824.
WorkSheet #3 gathers the info you need about your Old Property, including the fair market value of the property sold. Form 8824 uses the term ‘fair market value’ to mean the sale price of your Old Property.
WorkSheet #4Basic Fact-Gathering on the New Property.
WorkSheet #4 gathers the information you need about your New Property. Again, fair market value is the IRS term for “purchase price.”
The identification date (line “D” below) for your New Property is the date that you submitted your 45-day identi-fication form to us, whether you faxed or mailed it. If you mailed it to us, use the postmark date. If you closed before completing a 45-Day identification form, then the closing date is the date the “New Property was Identified.”
Fair Market Value (or FMV) - The IRS
term for the sales/purchase price. Most
of the time, the sales/purchase price and
fair market value are the same thing. They
only differ if you sold your Old Property
or bought your New Property for a price
that is significantly higher or lower than
what the property is really worth. While
this makes interesting court cases, it rarely
happens. If you are one of those rare
cases, feel free to call us at 866-694-0204.
Identification Date – The date
you sent us the list identifying the
property or properties you might
purchase. You probably used
our 45-Day Identification Form. If
you didn’t complete this form and
bought the property before Day-45,
then the closing date is your “New
Property Identification Date.”
WorkSheet #3 - no adjustment
Buy-Down Adjustment
12
Rental House111 First St., Vail, CO
12/19/201731,544
100,00001/10/2005
Rental House222 Second St., Naples, FL
03/09/201802/02/2018
125,000
WorkSheet #4 (Line E) = $80,000
Remember: IGNORE these Buy-Down boxes if you bought up.
Buy-Down Adjustment
13
WorkSheet #5Calculating the Debt on the Old and New Properties.
The last bit of information you need for Form 8824 is the amount of debt that was paid off on the Old Property and the amount of new debt taken on with the New Property. So the question arises: when is the liability “associated” with the property? Most of the time the property itself is security for the loan, clearly making it, “associated with the property,” but it’s not necessary that the debt be a lien against the property. For example, payments made on unsecured debt to a friend or relative is considered “debt” as long as the debt is related to the property. Also considered debt are payments made to your bank for advances on a credit line where the money is used for the property.
However, payments to yourself to repay money you put into the property are not debt. Neither are advances on a credit line secured by the property that were used for some purpose other than the property.
When referring to the debt associated with your Old and New Properties, the IRS uses the term loans assumed. Don’t let this confuse you. Just walk through the WorkSheets and you will determine the correct amounts for these items on Form 8824.
WorkSheet #5 is used to record the affects of debt on your exchange.
Debt – Any liability
associated with
either Old or New
Properties.
40,000
75,000
Loans Assumed –
Can be:
1. Any liability that the ‘other party’
took over on your behalf,
OR...
2. The amount of outstanding
mortgage that was paid off with
the sale proceeds from your Old
Property,
OR...
3. The amount of the mortgage on
your New Property.
WorkSheet #5 (Line B) = $40,000
Buy-Down Adjustment
14
WorkSheet #6 Calculating the Net Cash Paid or Received.
Next, WorkSheet #6 calculates the net amount of cash that was either paid or received. In some cases, the WorkSheet will show that you received cash when in fact the cash was used
to pay the closing costs. Don’t worry, that gets factored out later.
WorkSheet #7 – Calculating Line 15 on Form 8824.
Almost there! To finish our example, we need to make detailed calculations that will be used to complete Lines 15 and 18 on Form 8824. For these, we’ll refer to the work already completed in WorkSheets 1-6. At the conclusion of our example we’ll also work through the line-by-line completion of Form 8824 in WorkSheet #9.
For most exchanges, your calculations on Form 8824 will begin on Line 15. In simple terms, Line 15 calculates the value of everything you received in the exchange in addition to your New Property. For example, it factors in any other property received or debt assumed. It also factors in the net effect of any exchange expenses that were incurred during the exchange.
The purpose of WorkSheet #7 is to determine if you have any taxable gain. The IRS calls
Cash – The actual money that, after your exchange is
complete, is either paid out of your pocket or received
by you. Simply put: “after the dust settles, the amount of
money that you end up paying or receiving.”
125,000
75,000
100,000
40,000
50,000
60,000
10,000
0
Buy-Down Adjustment
WorkSheet #6 (Line A) = $80,000 (Line B) = $40,000 (Line C) = $40,000 (Line G) = $20,000
15
this gain boot. Boot can either come from: 1) cash you received, or: 2) net debt relief (see page 16). In other words, cash boot or debt boot.
The most common type of cash boot occurs when you take cash out of the exchange. Cash boot also occurs when there is cash left over at the end of the exchange. It is possible to have cash boot even though you didn’t receive any cash. For example, if you had $1,000 in repairs on your Old Property that were paid at closing, the IRS considers this $1,000 ‘boot’ because it ‘came to you.’ In other words it is taxable, although in this case you can take a deduction on your tax return for $1,000 in repair expenses. So in the big picture, you do have cash boot (even
though you didn’t receive the cash personally), but you don’t have a tax liability. The moral of the story is if your calculations show that you have boot: don’t panic! In your overall tax picture, you may not need to pay tax on this amount.
Net debt relief occurs when the debt you paid off on the Old Property is less than the new debt on the New Property. However, the story doesn’t end there: contrary to some, this does not automatically result in debt boot. Additional cash from any other source that you put into the exchange for the purchase of the New Property offsets the debt that was paid off on the Old Property. Therefore, if the amount of new debt plus the additional cash put into the exchange is higher than the debt that was paid off on the Old Property, you do not have debt boot.
WorkSheet #8 – Calculating Line 18 on Form 8824.
On Line 18 you are asked to calculate the basis of the Old Property given up. This calcula-tion also leads to revealing the basis of your New Property. The basis of your New Property equals the basis of your Old Property, plus the buy-up (or increase) to your New Property, plus your total exchange expenses.
WorkSheet #8 works through this calculation for you.
Debt Relief – The net amount of debt that was
paid off in your exchange. The amount of taxable
debt relief is affected by the amount of additional
cash you put into the exchange.
Old Property basis+ New Property buy-up (or increase)+ your total exchange expenses———————————————————= New Property basis
Last step if you’re buying up! (and just two to go if buying down!) Now it’s time to fill in the blanks on Form 8824. In WorkSheet #9, we created reference columns to help you match up what goes where. The only new calculations are the realized and recog-nized gains. Line 19 of Form 8824 calcu-lates realized gain. Realized gain is the actual amount of ‘profit’ or gain you received from the sale of your Old Property. It is not the gain you pay tax on – remember: that’s called recognized gain.
In this example, the realized gain is the purchase price of Fred and Sue’s New Property calculated on Line 17 ($125,000) minus their basis in the property calculated on Line 18 ($68,544). Their realized gain is $56,456 ($125,000 minus $68,544). Their recognized gain is calculated on Line 20. Because it’s “0” the realized gain is equal to the deferred gain. This always happens when you exchange up and reinvest all
the cash from your Old Property into the purchase of your New Property.
This is the goal of doing a 1031 exchange: deferring the capital gains tax due when you sell your Old Property. This is your ‘deferred’ 1031 exchange gain.
Deferred Gain – The amount
of realized gain that is
rolled forward into your New
Property. No tax is paid at
this time on the deferred gain.
Rental House Rental House
01/10/200512/19/201702/02/201803/09/2018
0125,000 125,00068,54456,456
0
00
56,45668,544
WorkSheet #9 Line 15 = $8,000 Line 16 = $80,000 Line 17 = $88,000 Line 18 = $31,544 Line 20 = $8,000 Line 21 = $8,000* Line 23 = $8,000 Line 24 = $48,456 Line 25 = $31,544
*WorkSheet #10 explains this adjustment
Buy-Down Adjustment
18
The amount of this deferred gain actually makes sense when you think about what hap-pened: we sold our Old Property that has a basis of $31,544 for $100,000. This resulted in a gain of $68,456. When Fred and Sue take this gain and subtract the costs incurred to sell the Old Property and buy the New Property of $12,000, you arrive at the same deferred gain ($56,456) that is calculated on Lines 19 and 24 of Form 8824.
If you did NOT buy-down, turn the page now . . . .
Buy-Down Adjustment
One more step if you are Buying Down...
In our buy-down example, the realized gain is the fair market value of the property received calcu-lated on Line 17 ($88,000), MINUS your basis in that property calculated on Line 18 ($31,544). Your realized gain is $56,456 ($88,000 minus $31,544). The amount of the deferred gain actually makes sense when you think about what happened: we sold our Old Property that has a basis of $31,544 for $100,000. This resulted in a gain of $68,456. When you take this gain and subtract the costs incurred to sell the Old Property and buy the New Property of $12,000, and subtract the $8,000 of recognized gain calculated on Line 23, you arrive at the same deferred gain of $48,456 that is calculated on Line 24 of Form 8824. The amount of your recognized gain also makes sense: you bought down by $20,000 (from $100,000 to $80,000), but you had closing costs of $12,000. So, the net taxable amount is $8,000 ($20,000 minus $12,000).
WorkSheet #10 – Calculating Depreciation Recapture (FOR BUYING DOWN ONLY)
Because you have a taxable gain, complete WorkSheet #10 to figure the character of the gain. This determines which tax rate (recapture or non-recapture) you use to calculate your actual tax liability. The federal recapture tax rates are higher than non-recapture rates because the IRS allows you to offset ordinary income by reporting depreciation
in the prior tax years while you held the property. 18,456
8,0008,000
19
Congratulations!You’ve conquered the task of calculating your exchange! Now send your signed and completed 2-page 8824 Form along with your tax return to the IRS.
We hope this information and the WorkSheets provided are helpful. If you got stumped along the way or have more questions, contact us at [email protected]. Or call us nationwide toll-free, at 866-694-0204. As always, the Experts are available to assist you.
Additional Issues:Things that may affect
the reporting of your exchange
Which tax-year do I report my gain?The IRS calls recognized gain ‘boot.’ There are two types of boot: debt boot and cash boot. Both are taxable.
Debt boot arises when the mortgage paid off on your Old Property was greater than the combination of the new loan and any additional investments in the New Property. This gain is generally taxable in the same year you report the 1031 exchange.
Cash boot is cash that you receive as part of the sale of your Old Property. This cash either came to you at the sale closing of the Old Property, or was left over at the end of the exchange. In either case, the gain is taxable to you in the same tax year that you receive it. For most exchangers, this happens within the same year.
If you received cash at the end of your exchange in a different tax-year than your sale,
Our goal is to refine and improve 1031TaxPak for future exchangers.If you have any input or feedback for us, we’d love to hear it at
things get more complicated. First, because you received cash proceeds from the sale in a subsequent tax year, the tax on that cash is automatically subject to installment sale rules. This means you report the cash as being received in that subsequent year, not in the year that the Old Property was actually sold.
You can ‘elect out’ of installment sale treatment by filing a state-ment with your tax return stating you are electing out. If you do, the gain on the cash boot will be taxable in the year that the sale occurred. You must file your statement to ‘elect out’ with a timely filed tax return for the year that the sale occurred. You can extend the due date for your tax return from April 15 to October 15 by filing an extension. This will give you the benefit of time to determine the best way to report your gain.
Example: Say you sold your Old Property as part of a 1031 exchange in late 2017 and bought the New
Property in 2018. You had $10,000 of proceeds left over that you received in cash after your
180-day exchange period ended in 2018. These proceeds would normally be reported as
capital gain proceeds of $10,000 on your tax return for 2018 based on the installment sale
rules. However, if you elect out of installment sale reporting on your 2017 tax return, you
would report $10,000 of additional proceeds (cash boot) on your 2017 return.
Installment Sale – A tax situation
where the proceeds or cash from the
sale of property is received in two or
more consecutive tax years. Special
IRS rules apply for installment sales.
2017
Election made under section 1.168(i) - 6T(i)
Fred and Sue Jones 123-45-6789Form 8825 Building
$250,000
$800,000
21
Other Exchange Reporting Resources Available at 1031TaxPak.com
In preparing 1031TaxPak, our objective was to create an easy-to-follow guide that simplifies the process of reporting your exchange. The information in this GuideBook covers reporting issues found in almost all 1031 exchanges. But there are other reporting issues that occur in more complex exchanges.
So to keep TaxPak simple, we chose to not discuss the unique circumstances here—but we didn’t ignore them either. Instead, we created 1031TaxPak.com, where you can access infor-mation you need for these more unique situations.
If these situations (discussed briefly below) apply to you, visit 1031TaxPak.com. There you’ll find more detailed discussions and guides to these very specific circumstances. If Internet access is not available, call us nationwide toll-free at 866-694-0204, and we can have these additional materials sent to you via regular mail.
More 1031TaxPak Online
• Buy-Down Example. The sample exchange in this GuideBook works through a very com-mon situation where the investor exchanges into a property of higher value than the one that was sold. For exchangers who bought property less than what they sold, the examples and WorkSheets included in TaxPak require additional explanation. If you bought down in your exchange, you can download this entire TaxPak example as a Buy-Down from 1031TaxPak.com.
• How to treat depreciation carried forward to your New Property. In a 1031 exchange, you roll the capital gain forward into the New Property, which may include depreciation you’ve taken. We explain how to treat this depreciation in your ongoing ownership of the New Property, in both buy-up and buy-down exchanges.
• Allocation of basis between land and improvements. You may need to adjust your treat-ment of ongoing depreciation to account for the differing values of land and improvements included in your property. We explain what this means and offer suggestions on how to treat it for tax purposes.
• How to Report Depreciation on both your Old and New Property when you do a 1031 exchange.
• Handling Contract Notes (Seller Financing). If you carried financing on the sale of your Old Property, 1031TaxPak.com explains how this is treated for tax purposes.
• When to file Form 4797. If the Old Property was used as business property, you will also need to file Form 4797 with your tax return. Download this form at 1031TaxPak.com where we explain when and how to use it.
• When to file Schedule E. If either your Old or New Property was used as rental property, you will need to file a Schedule E with your tax return. We explain more about how to handle reporting issues for rental property.
• Allocation of Settlement Costs in a 1031 Exchange. This table shows how settlement costs are allocated between property costs, loan costs and deductible items.
• Tax Changes affecting 2017 Tax Returns. During the year there may be changes that could affect how you report your 1031 exchange. If this happens, we discuss them here.
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