Tax Time- Reporting 1031 Exchanges

Con­grat­u­la­tions! You have suc­cess­ful­ly fol­lowed all the rules and com­plet­ed your exchange on time.  You uti­lized the ser­vices of a Qual­i­fied Inter­me­di­ary (QI) so you are in full com­pli­ance with IRC §1031.

Feb­ru­ary 19, 2023
By Al DiNi­co­la, AIF®, CEPA ™
adinicola@namcoa.com
DST 1031 Spe­cial­ist
NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC

You pur­chased a prop­er­ty equal to or in excess of the prop­er­ty you sold. You used all the cash pro­ceeds and replaced the debt that was paid off on the prop­er­ty you sold. Now it is time to report the details of the exchange as required by the IRS. SO, exact­ly what does the IRS want to know about the exchange. Maybe not every­thing but there are key ele­ments of your exchange you need to sub­mit.

CPAs for Com­plete Answers

We are not CPAs and would sug­gest con­sult­ing your CPA for full com­pli­ance.  This may serve as an overview on what to expect.

The Inter­nal Rev­enue Ser­vice pro­vides sev­er­al forms that need to be com­plet­ed reflect­ing your exchange details. Every­thing starts with form 8824. Real estate investors who have uti­lized the 1031 exchange are required to fill out this form. This reflects the trans­ac­tions from the pre­vi­ous tax report­ing peri­od. There is a com­pli­ca­tion that occurs when the sale of the relin­quished prop­er­ty and the acqui­si­tion of the replace­ment prop­er­ty does not occur dur­ing the same tax report­ing year. For exam­ple, if you sold your prop­er­ty in August 2022 and com­plet­ed your exchange in Decem­ber 2022 the process is straight for­ward.  How­ev­er, if you sold your prop­er­ty in August 2022 (iden­ti­fied your replace­ment prop­er­ties with the pre­scribed 45 days) and are wait­ing to close in Feb­ru­ary 2023 there is an extra step required.  You would need to fill out form 8824 and attached to your 2022 tax returns. You would com­plete the report­ing when fil­ing your 2023 returns.

Fill in the Blanks- Cor­rect­ly

• To avoid any unnec­es­sary penal­ties or lia­bil­i­ties for tax­es the forms need to be filled out cor­rect­ly. The IRS typ­i­cal­ly may want answers to Who, What, Where, When, how much, and more ques­tions that will be on Form 8824!
• What was the prop­er­ty exchanged or a descrip­tion?
• Did you make any mon­ey (gain) or lose mon­ey (loss) on sale of oth­er prop­er­ty you sold or gave up that was not part of the exchange?
• What was the dates of the replace­ment prop­er­ties iden­ti­fied and when the prop­er­ty was closed, or title trans­ferred?
• What were the pro­ceeds from the sale, was there a mort­gage paid off, or any oth­er Cash received or any oth­er relief of lia­bil­i­ties?
• Were there any relat­ed par­ties to the trans­ac­tion.
• What was the adjust­ed basis on the prop­er­ty that was relin­quished. And what was the gain. 
• What was the fair mar­ket val­ue of the prop­er­ty that was acquired.

There are four sec­tion to Form 8824.

• 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- Defer­ral of Gain from Sec­tion 1043 Con­flict of Inter­est Sales

Part I (lines 1–7)  as stat­ed includes infor­ma­tion on the exchange. This would include descrip­tion of the relin­quished prop­er­ty which is a full address or oth­er accept­able descrip­tion (occa­sion­al­ly ref­er­enced as the down-leg), the date you trans­ferred title to buy­er, when you iden­ti­fied your poten­tial replace­ment prop­er­ties (45-day replace­ment noti­fi­ca­tion) to your Qual­i­fied Inter­me­di­ary (QI), and final­ly the date you closed on one or more of the iden­ti­fied prop­er­ties on your list (occa­sion­al­ly ref­er­enced as the up-leg).

Part II (lines 8–11) address­es any relat­ed par­ty exchange infor­ma­tion.  If you had an inter­est in or stake in a prop­er­ty with a relat­ed par­ty trans­lat­ed as any fam­i­ly mem­ber, spouse, grand­par­ents, sis­ter, broth­er, a part­ner­ship, etc. would need to be report­ed.    There a few not­ed excep­tion includ­ing death of relat­ed par­ty. As always con­sult your tax advi­sor.

Part III (lines 12–25) focus­es on the finan­cial num­bers relat­ed to the exchange. This is how the IRS tracks the finan­cial details of your exchange. Top­ics and ques­tions include ref­er­ences to fair mar­ket val­ue, adjust­ed basis of relin­quished prop­er­ty, gain on prop­er­ty, cash received, adjust­ed basis of like kind prop­er­ty, real­ized gain and oth­er finan­cial relat­ed ques­tions.

Part IV (lines 26–38). This would be a spe­cial sit­u­a­tion and used only by offi­cers or employ­ees of the exec­u­tive branch of the fed­er­al gov­ern­ment or judi­cial offi­cers of the fed­er­al gov­ern­ment (includ­ing cer­tain spous­es, minor or depen­dent chil­dren, and trustees as described in sec­tion 1043) for report­ing non­recog­ni­tion of gain under sec­tion 1043 on the sale of prop­er­ty to com­ply with the con­flict-of-inter­est require­ments. This part can be used only if the cost of the replace­ment prop­er­ty is more than the basis of the divest­ed prop­er­ty.

Under­stand­ing and Exe­cu­tion

Many CPAs and espe­cial­ly tax advi­sors under­stand the process espe­cial­ly those who han­dle 1031 exchanges on an ongo­ing basis.  The exe­cu­tion of fill­ing out Form 8824 should be very easy for those pro­fes­sion­als.  CPAs who are engag­ing with an investor for the first time may need to ask a lot of ques­tion of the investors. A big part of the solu­tion will come back to the indi­vid­ual investor under­stand­ing the relin­quished prop­er­ty details when acquired (typ­i­cal­ly found on the clos­ing doc­u­ments) as well as all cost involved dur­ing the own­er­ships that may add to the basis in the prop­er­ty.

Stand­ing by to assist

We deal with 1031 exchanges all the time and are hap­py to engage with CPAs on the ini­tial ques­tion for your exchange.  We have engage with CPA on clar­i­fy­ing the acqui­si­tions of Delaware Statu­to­ry Trusts (DSTs).  DSTs have been uti­lized by investors for about 20 years.  How­ev­er, many CPAs do not see as many exchanges involv­ing DSTs as com­pared with tra­di­tion­al real estate. There are a few more details when a DST is acquired or relin­quished.  Typ­i­cal­ly, those details may be in the descrip­tion and per­cent­age of own­er­ship. 

Future Dis­cus­sion.

There are occa­sions when investors engage in a par­tial exchange.  This is either by design or by one or more of the prop­er­ties iden­ti­fied falling out or a failed exchange.  We will address par­tial exchanges in an upcom­ing post.

DSTs are not for all investors. The acqui­si­tion of a DST is for accred­it­ed investors only. Con­tact your invest­ment advis­er for addi­tion­al details on how a DST may be a solu­tion to your 1031 Exchange and suit­ed for your invest­ment future. For more infor­ma­tion on how to prop­er­ly set up an IRC 1031Tax Deferred Exchange or if you are an accred­it­ed investor and would like addi­tion­al infor­ma­tion on a DST con­tact Al DiNi­co­la at 239–691-8098 or email adinicola@namcoa.com.

This is not an offer to pur­chase or solic­i­ta­tion to pur­chase any secu­ri­ty, as such be made only through an offer­ing mem­o­ran­dum or prospec­tus. Invest­ing in secu­ri­ties, real estate, or any invest­ment, whether pub­lic or pri­vate, involves risk, includ­ing but not lim­it­ed to the poten­tial of los­ing some or all of your invest­ment dol­lars when you invest in secu­ri­ties. You should review any planned finan­cial trans­ac­tions that may have tax or legal impli­ca­tions with your per­son­al tax or legal advi­sor. NAMCOA, LLC is a Reg­is­tered Invest­ment Advi­sor, reg­u­lat­ed by SEC (Secu­ri­ties and Exchange Com­mis­sion). Our cor­po­rate office is locat­ed at 999 Van­der­bilt Beach Road, Suite 200, Naples Flori­da 34108. Secu­ri­ties Offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC. 8215 SW Tualatin- Sher­wood Rd, Suite 200, Tualatin, OR 97062.  MSC-BD, LLC and NAMCOA are inde­pen­dent­ly owned and are not affil­i­at­ed.

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