When and How to Report a 1031 Exchange to the IRS
WHEN TO REPORT A 1031 EXCHANGE
A 1031 exchange transaction is reported on the tax return for the tax year that the relinquished property was transferred even if the exchange was not completed in that same year. For example, if a taxpayer started an exchange in November of 2021, and completed the exchange in February of 2022, the exchange will be reported on their 2021 tax return.
If the exchange will not be completed by the deadline for filing, the taxpayer may need to file for an extension using Form 4868. Filing the return before the exchange is complete will automatically end the exchange and the capital gains would not be deferred.
Sometimes an investor starts an exchange in one calendar year but is unable to acquire the replacement property and the exchange fails the following calendar year. In this situation, the money received can be treated as an installment sale and reported on the tax return of the year the money was received. Bona fide intent to complete the exchange must be demonstrated.
The taxpayer may also be required to report the exchange on their state tax return and some states have a specific reporting requirement when property sold in that state is exchanged for property out of state. We recommend consulting a tax advisor about the specifics of reporting each exchange.
HOW TO REPORT THE EXCHANGE
Your 1031 exchange must be reported by completing Form 8824 and filing it along with your federal income tax return. If you completed more than one exchange, a different form must be completed for each exchange. For line-by-line instructions on how to complete form, download the instructions here.
It is very important that you file Form 8824 along with your return, since your settlement agent will file a 1099-S upon the sale of your property. Taxpayers are often confused as to why a settlement agent would file the 1099-S with the IRS when they are doing a 1031 Exchange. Your settlement agent is required to submit the 1099-S upon the completion of every sale and Form 8824 is your way of notifying the IRS that you did an exchange on that sale and may have deferred your tax liability.
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