Form 8824 Instructions: Reporting a 1031 Exchange Step by Step
Form 8824, Like-Kind Exchanges, is how you report a 1031 exchange on your federal return. You file it with the return for the year you transferred the property you gave up. Part I records the properties and dates, Part II covers related-party exchanges, and Part III figures your realized gain, the gain you must recognize because of boot, the gain you defer, and the basis of your replacement property.
This guide walks through the form using the IRS Instructions for Form 8824, then fills it in for a simple exchange with cash and debt boot.
Who must file Form 8824, and when
If you transferred property in a like-kind exchange during the tax year, you file Form 8824 with that year's return. If the exchange was with a related party, you also file it for the two years after the year of the exchange. If you made more than one exchange, the instructions let you file a summary Form 8824 with your own attached statement for each exchange.
Since 2018, only real property qualifies. The form says it plainly: only real property should be described on lines 1 and 2. Furniture, appliances and other personal property sold with a building are a separate taxable sale.
Part I: the exchange and the deadlines
| Line | What to enter |
|---|---|
| 1 | Description of the like-kind property you gave up (country if outside the U.S.) |
| 2 | Description of the like-kind property you received |
| 3 | Date you originally acquired the property you gave up |
| 4 | Date you transferred it |
| 5 | Date you identified the replacement by written notice |
| 6 | Date you received the replacement |
| 7 | Whether the exchange was with a related party, directly or through an intermediary |
Lines 5 and 6 document the deferred exchange deadlines. Per the instructions, you must identify the replacement within 45 days after transferring the property you gave up, and receive it within 180 days, or by the due date of your return including extensions, whichever is earlier. The 180-day window can be cut short if your return is due first, so extend the return when a year-end exchange is still open. If a deadline is missed, see failed 1031 exchange for when the gain is taxed.
Part II: related-party exchanges
Related parties include your spouse, children, grandchildren, parents, grandparents, brothers and sisters, and related corporations, partnerships, trusts and estates (§1031(f)). If either side disposes of the exchanged property within two years after the last transfer, the deferred gain is generally recognized in the year of that disposition, unless an exception on line 11 applies (a later death, an involuntary conversion, or no tax-avoidance purpose).
The instructions also warn: if a related party sold property into your exchange for cash through an intermediary and that became your replacement property, do not file Form 8824 unless a line 11 exception applies. Report it as a sale.
Part III: gain, boot and basis, line by line
| Line | What it is |
|---|---|
| 12 to 14 | Only if you also gave up non-like-kind property: its value, basis and gain or loss |
| 15 | Cash received, fair market value of other property received, plus net liabilities assumed by the other party, reduced (not below zero) by exchange expenses |
| 16 | Fair market value of the like-kind property you received |
| 17 | Line 15 + line 16 |
| 18 | Adjusted basis of the property you gave up, net amounts paid to the other party, plus exchange expenses not used on line 15 |
| 19 | Realized gain or loss (line 17 minus line 18) |
| 20 | The smaller of line 15 or line 19, but not less than zero |
| 21 | Ordinary income under the recapture rules. Also enter on Form 4797, line 16 |
| 22 | Line 20 minus line 21. Recognized gain reported on Form 4797 or Schedule D, unless the installment method applies |
| 23 | Recognized gain (line 21 + line 22) |
| 24 | Deferred gain (line 19 minus line 23) |
| 25 | Basis of like-kind property received (line 18 + line 23 - line 15), split on 25a to 25c into §1250, §1245 and intangible property |
Net liabilities. Line 15 includes debt relief only to the extent the liabilities the other party assumed exceed the liabilities you assumed, cash you paid and other property you gave up. New debt you take on offsets debt relief. It does not offset cash you receive. The 1031 boot guide covers netting in detail.
Multi-asset exchanges. If you transferred and received more than one group of like-kind properties, the instructions have you attach your own statement showing the realized and recognized gain instead of completing lines 12 through 18, and enter the results on lines 19 through 25 (Reg. §1.1031(j)-1).
Worked example: a 1031 with cash and debt boot
Simple example. You give up a rental building worth $1,200,000 with an adjusted basis of $400,000 (after $250,000 of straight-line depreciation) and a $300,000 mortgage, paid off at closing. Through a qualified intermediary, you buy a $1,000,000 replacement with a new $250,000 loan and $750,000 of exchange funds. The intermediary releases the last $150,000 to you in cash. Ignore closing costs to keep the math simple.
| Line | Amount | How |
|---|---|---|
| 15 | $200,000 | $150,000 cash + $50,000 net debt relief ($300,000 old loan - $250,000 new loan) |
| 16 | $1,000,000 | Replacement value |
| 17 | $1,200,000 | 15 + 16 |
| 18 | $400,000 | Adjusted basis given up; no net amount paid, since the new loan is less than the old |
| 19 | $800,000 | Realized gain |
| 20 | $200,000 | Smaller of line 15 or line 19 |
| 21 | $0 | No cost segregation; straight-line building has no §1250 additional depreciation |
| 22 | $200,000 | Recognized gain to Form 4797, line 5 |
| 23 | $200,000 | Recognized gain |
| 24 | $600,000 | Deferred gain |
| 25 | $400,000 | $400,000 + $200,000 - $200,000 |
Check the basis: replacement value $1,000,000 minus deferred gain $600,000 = $400,000. It matches line 25.
On the Schedule D worksheet, because you took $250,000 of straight-line depreciation, the $200,000 of recognized gain is generally treated as unrecaptured Section 1250 gain, taxed at up to 25%. That is why boot tends to cost more than its size suggests. See 1031 exchange depreciation recapture and unrecaptured Section 1250 gain.
If closing costs are paid. Exchange expenses reduce line 15 (and any not used there are added on line 18). In a real exchange, get the closing statements and the intermediary's accounting and let your CPA tie them out.
Line 21: recapture in an exchange
For §1245 property, line 21 is the smaller of the depreciation on it (up to the realized gain) or the line 20 gain plus the fair market value of non-§1245 like-kind property received. That is the §1245(b)(4) rule: if your old building was cost-segregated and the replacement has fewer §1245 components, you can have ordinary recapture with zero boot. The IRS instructions include an example where $35,000 of §1245 recapture arises even though the replacement is all §1250 property.
For §1250 property, line 21 is based on additional depreciation above straight-line, which is usually zero for buildings placed in service after 1986. The exception is bonus or accelerated depreciation on cost-segregated 15-year land improvements or qualified improvement property: that excess is §1250(a) ordinary recapture, limited in an exchange by §1250(d)(4). The instructions include an example where $30,000 of it lands on line 21.
Form 8824 when boot is an installment note
If you take part of the boot as a note from the buyer instead of cash, the instructions say: see §453(f)(6) to figure the installment sale income for this year and report it on Form 6252. Under §453(f)(6), the like-kind property is left out of the contract price and payments, so each note dollar is mostly gain, reported as you collect. Ordinary recapture on line 21 is still recognized in the year of the exchange (§453(i)).
The slice must be carved out in the purchase contract at closing. See using an installment sale for 1031 boot and model it in the 1031 boot calculator. The ISC guide on how to calculate 1031 boot covers the netting math.
Former homes and Section 121
Section 1031 does not apply to property used solely as your personal residence. But if the property you gave up was your main home for at least 2 of the 5 years before the exchange and is now a rental, §121 may exclude part of the gain. The instructions have you write "Section 121 exclusion" and the amount on line 19 without reducing line 19, adjust line 20, and add the exclusion back when figuring basis on line 25. See selling a rental that was your primary residence.
California: form FTB 3840
If you exchange California real property for like-kind property outside California, the Franchise Tax Board requires form FTB 3840 for the year of the exchange and for each later year, generally until the California-source deferred gain is recognized. Nonresidents must file it even with no other California filing requirement. California taxes that deferred gain when you eventually sell the out-of-state replacement.
Common Form 8824 mistakes
- Netting new debt against cash received. New debt offsets debt relief, not cash.
- Missing the dates. Lines 4 through 6 should prove the 45- and 180-day deadlines.
- Forgetting §1245(b)(4). A cost-segregated building traded for a plain building can create ordinary recapture with zero boot.
- Reporting boot on the wrong form. Rental or business gain goes to Form 4797, line 5; ordinary recapture to line 16; an installment note to Form 6252.
- Dropping the basis split. Lines 25a to 25c drive the replacement's depreciation.
- Skipping the related-party follow-up filings for the two years after the exchange.
- Forgetting FTB 3840 on a California-to-elsewhere exchange.
Bottom line
Form 8824 turns a 1031 exchange into four numbers: realized gain, recognized gain, deferred gain and new basis. Boot on line 15 is what you pay tax on, and on a depreciated building it usually lands first on unrecaptured Section 1250 gain, taxed at up to 25%. Recognized gain flows to Form 4797 (see our Form 4797 guide) or to Form 6252 if you took boot as a note. Keep the closing statements and intermediary records, because line 15 and line 18 are only as good as they are. The free book has the full boot decision system.
Questions to ask your CPA
- How much boot do I have after netting cash, debt relief and exchange expenses?
- How much of the recognized gain is unrecaptured Section 1250 gain?
- Did my old property have cost-segregated §1245 components, and does the replacement have enough §1245 property to avoid §1245(b)(4) recapture?
- How should the replacement's basis be split between §1250 and §1245 property on lines 25a and 25b?
- If part of the boot is a note, how will Form 6252 report it each year?
- Is anyone in the exchange a related party, and what do I file for the next two years?
- Does California require FTB 3840 for my exchange?
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Educational only, not tax, legal or investment advice. Examples are illustrative. Have your CPA or tax attorney review your facts before you act. Hans Goldstein is a licensed insurance agent (CA Insurance License #4273294) and is not a CPA or attorney. He is paid a commission only if a structured installment sale is funded; seller financing pays him nothing. Disclosures.