Published 07/28/2026
The CPA’s Guide to 1031 Exchanges (2026): Reporting, Edge Cases & Client Coordination
The TL;DR Version:
1031 exchanges are a powerful tool for your clients, especially when it comes to their real estate portfolios. So when do CPAs need to be involved in 1031 exchanges? And how can you best advise your clients on 1031 exchanges? This guide walks through the four phases of CPA involvement, the five client signals worth flagging at quarterly review, and the technical details that can make or break an exchange. Keep reading below to learn more.
What Does a CPA Handle During a 1031 Exchange?
Your client just called your office. They're under contract to sell a commercial building they've held for twelve years. They want to know if they can "do a 1031." You know the process isn’t simple, but with the right timing and guidance, it could defer a significant amount of their capital gains taxes.
When advising clients on 1031 exchanges, it’s important to consider each phase of the process.
Phase 1: Pre-Sale Planning
This is where the most value is created. Before the relinquished property goes under contract, you're modeling the tax exposure (capital gains, depreciation recapture, net investment income tax), evaluating whether the client's replacement property goals are realistic, confirming the property qualifies as held for investment or productive use in a trade or business, and identifying any unique facts or circumstances that could raise novel tax issues.
Phase 2: Exchange Execution
Once the sale of your client’s property is imminent, you’ll need to involve an agreed-upon Qualified Intermediary. They’ll take the operational lead by holding exchange funds, preparing the exchange agreement, and documenting the process. Your role here is to engage the QI before closing, confirm the exchange agreement is in place, and advise your client on identification strategy within the 45-day window.
Phase 3: Replacement Property Acquisition
As your client moves toward closing on the replacement property, you're tracking the 180-day deadline, reviewing the replacement property's basis implications, and flagging any boot that could trigger partial recognition.
Phase 4: Tax Reporting
Finally, you’ll coordinate any tax-related documents with your client. Form 8824 is the centerpiece, but the downstream effects, such as adjusted basis and depreciation, also require careful attention. We’ll cover this further below.
1031 Exchanges for CPAs and Tax Advisors: When You Should Refer Clients to Qualified Intermediaries
If you’re acting as a tax advisor for a client’s 1031 exchange, the short answer is: before their relinquished property closes. The IRS requires that a QI be engaged and the exchange agreement executed before the transfer of the relinquished property. If your client has already closed, the exchange opportunity is generally gone.
If your client asks what role the QI would play, explain that they’re a third party who holds the exchange proceeds, prepares the required exchange documentation, and ensures the taxpayer doesn't take constructive receipt of the funds. Your role would remain relatively unchanged, as you’ll continue to advise on the overall strategy and tax deferral.
When evaluating QI partners, it's worth asking about how exchange funds are held. First American Exchange Company, for example, holds client funds in FDIC-insured segregated accounts. Visit our services page to learn more about our process.
How to Identify Clients Who Qualify for 1031 Exchanges
Another key role as a CPA helping to execute a 1031 exchange is to keep your eyes open for clients who fit the bill. Many exchange opportunities start at the advisor level, so here are five signs to look out for:
Significant unrealized appreciation on investment real estate: If a client holds property with a low adjusted basis and substantial fair market value, a sale without an exchange could trigger a large capital gains event. Model the exposure and open the conversation.
Depreciation nearing full recapture: When a property is nearly or fully depreciated, the recapture exposure upon sale increases. A 1031 exchange can defer that recapture, though it will carry forward to your client’s replacement property basis.
Portfolio consolidation or diversification: Clients looking to trade multiple smaller properties for one larger asset, or vice versa, are natural 1031 candidates. Thankfully, the exchange structure can accommodate both directions.
Geographic relocation of investments: Is your client moving from one market to another?
1031 exchanges are a potential option for CPAs to recommend. Say they’re exiting a high-cost coastal market and are on the hunt for a similar investment property in their new home state, a 1031 can be a great way to defer capital gains taxes. Of course, some state-specific laws may differ surrounding 1031 exchanges, which is important for advisors to remain aware of.
Estate planning conversations: Clients who intend to hold property until death may benefit from a stepped-up basis at death, which can effectively eliminate the deferred gain. But clients who need liquidity or want to reposition before that point may benefit from a series of exchanges. The interplay between 1031 and estate planning is worth modeling specifically.
Reporting a 1031 Exchange as a CPA: What Is Included on Form 8824?
Form 8824 is the IRS's dedicated reporting form for like-kind exchanges. It's where the exchange is documented, the realized and recognized gain is calculated, and the basis of the replacement property is established. Here's a practical breakdown:
What CPAs and tax advisors must include on Form 8824:
Description of the relinquished and replacement properties.
Dates of transfer and receipt.
Fair market value of both properties.
Amount of boot received (cash or non-like-kind property).
Realized gain and recognized gain.
Adjusted basis of the replacement property.
What isn’t included on Form 8824:
Depreciation recapture calculations (these go through Form 4797 and Schedule D).
State-level exchange reporting (varies by state).
Installment sale treatment if the exchange fails (Form 6252).
Basis tracking for the replacement property going forward (this is included in your depreciation schedule, not on the form itself).
One common error made by CPAs or tax advisors on 1031 exchanges is failing to carry the correct adjusted basis forward to the replacement property's depreciation schedule. Why does this matter? The replacement property's basis is generally the relinquished property's adjusted basis, plus any boot paid, minus any boot received, adjusted for recognized gain. Getting this wrong could delay or heavily impact deferred gains.
Related-Party Rules of 1031(f): The Trap CPAs See Most Often
When advising clients on 1031 exchanges, it’s important to also consider Section 1031(f). This is one of the most misunderstood and consequential provisions in the exchange code. The rules apply when a taxpayer exchanges with or acquires replacement property from a related party, as defined under §267(b) and §707(b)(1).
The core restriction: if a taxpayer exchanges with a related party, both parties must hold their respective properties for at least two years following the exchange. If either party disposes of their property within that window, the deferred gain is generally recognized.
For CPAs in 1031 exchanges, here is how to spot what this looks in practice:
A client who sells to a family member and acquires replacement property from another family member may trigger §1031(f). This may happen even if the transactions appear independent.
The rules apply to both direct exchanges or swaps with related parties and indirect exchanges where the replacement property is acquired from a related party.
There are exceptions, including exchanges where neither the exchange nor the subsequent disposition had tax avoidance as a principal purpose, but these require careful analysis and should not be assumed.
The practical guidance? Any time a client's exchange involves a family member, a controlled entity, or a business partner with a significant ownership overlap, flag it before the exchange closes. Ask: if you’re purchasing from a related party, do they plan to exchange as well, and will you both hold your respective property for two years? The cost of getting this wrong is full gain recognition with interest.
Understanding Depreciation Recapture in 1031 Exchanges
When it comes to advising clients on 1031 exchanges, a common misconception is that a 1031 exchange eliminates depreciation recapture. It doesn't. The exchange defers it, and the deferred recapture carries forward to the replacement property's basis.
When a client sells depreciable real property, the portion of the gain attributable to prior depreciation deductions is subject to recapture under §1250. This is taxed at a maximum rate of 25% for unrecaptured §1250 gain. When thinking about a client’s 1031 exchange as a CPA, success looks like the recapture being deferred alongside the capital gains. The ultimate hope is that the replacement property inherits a lower adjusted basis, which means future depreciation deductions are reduced.
The practical framework for considering implications:
Track the carryover basis carefully. The replacement property's depreciation schedule should reflect the adjusted basis from the exchange, not the fair market value at acquisition.
If the client eventually sells the replacement property in a taxable transaction, the full deferred recapture will be recognized by the IRS.
Clients who plan to hold until death may benefit from the stepped-up basis, which can eliminate the deferred recapture. This is worth modeling specifically in estate planning conversations.
How to Plan for Multi-State Coordination: Clawback, Withholding, and State-Specific QI Rules
Federal 1031 treatment is relatively uniform. State treatment is not. As a CPA in a 1031 exchange, you must treat investment properties in multiple states (or clients transferring from one state to another) differently.
Here are three issues to keep your eyes on in these situations:
State clawback provisions: This will vary from market to market, California being a prominent example. Some states have enacted legislation that requires taxpayers who exchange out of state to report and potentially pay state tax when the replacement property is eventually sold, even if the taxpayer no longer resides in or has a connection with the original state. These provisions vary significantly and require state-specific analysis.
Withholding requirements: Several states require withholding on the sale of real property by non-residents, even in a 1031 exchange. The withholding may be waivable if the exchange is properly documented and the waiver is filed in advance, but deadlines will likely vary by state.
State conformity to federal §1031: Most states conform to federal like-kind exchange treatment, but not all do so uniformly. A handful of states have decoupled from federal §1031 in specific circumstances. Confirm state conformity before advising a client that the exchange is fully tax-deferred at the state level.
Handing a Partial Exchange
Not every 1031 exchange is a clean, all-equity swap. If your client receives boot (cash, debt relief in excess of debt assumed, or non-like-kind property), the exchange becomes partial, and a portion of their capital gains is recognized. So, how can you calculate this as a CPA or tax advisor?
The gross profit ratio method is commonly used to calculate the recognized gain in a partial exchange:
Where:
Gross Profit = Realized gain minus any deferred gain.
Contract Price = Selling price minus any mortgage assumed by the buyer, plus any boot received.
Let’s use a hypothetical scenario to illustrate this:
A client sells a commercial property for $1,200,000. Adjusted basis is $400,000. The buyer assumes a $300,000 mortgage. The client acquires replacement property worth $800,000 and receives $100,000 in cash boot.
Realized gain: $1,200,000 − $400,000 = $800,000
Boot received: $100,000 cash
Recognized gain: $100,000 may be recognized (subject to depreciation recapture ordering rules)
Deferred gain: $700,000 carries forward to the replacement property's basis
The ordering rules matter here: depreciation recapture is recognized first, before capital gain. If the $100,000 of recognized gain includes recaptured depreciation, that portion is taxed at the §1250 recapture rate before any remaining gain is treated as capital gain.
The above example is illustrative only. Actual calculations depend on the specific facts of the transaction and should be reviewed with qualified tax counsel.
Not Sure About a 1031 Exchange? Here Is When a §453 Installment Sale May Be a Better Choice
Sometimes, a 1031 exchange is not the best choice. The reality of the real estate industry and tax market is that at times, liquidity is necessary. As a CPA during a 1031 exchange, providing flexible options provides great value. Maybe your client is motivated to defer capital gains over a period of time, without tying up cash entirely in a new investment. Perhaps they have a separate business purpose for which the funds are needed .
In some scenarios, §453 installment sale treatment may offer a partial gains mitigation strategy, spreading the recognized gain across the years in which payments are received, rather than recognizing it all in the year of sale.
When is an installment sale worth considering?
The client received installment payments (rather than a lump sum) from the buyer.
The gain is large enough that spreading recognition meaningfully reduces the tax burden.
The client's income is expected to be lower in future years.
Are there limitations with installment sales vs. 1031 exchanges?
Installment sale treatment is not available for dealer property or publicly traded securities.
Depreciation recapture under §1245 and §1250 must generally be recognized in full in the year of sale, regardless of installment treatment.
The client must not have received the full proceeds in the year of sale. If the QI distributed funds to the client, installment treatment may not be possible.
While this strategy is not always available, CPAs and tax advisors should discuss this with their clients before commencing a 1031 exchange process.
A Checklist for Completing Your Client’s Year-End Audit When Considering 1031 Exchanges
For any client who completed, attempted, or is mid-exchange during the tax year, we’ve included a checklist to work through with them to ensure the process is as smooth as possible:
Documentation:
Exchange agreement executed prior to relinquished property closing.
QI engagement letter and wire confirmation on file.
45-day identification notice (written, signed, delivered to QI within deadline).
Replacement property closing documents.
HUD-1 or closing disclosure for both properties.
Form 8824:
All four parts completed accurately.
Realized gain, recognized gain, and deferred gain reconciled.
Adjusted basis of replacement property calculated and documented.
Depreciation:
Replacement property depreciation schedule reflects carryover basis (not FMV).
Unrecaptured §1250 gain tracked and documented.
Prior depreciation schedules retained for audit trail.
State-Level:
State conformity confirmed for all states.
Withholding waivers filed where required.
Clawback exposure documented for any out-of-state exchanges.
Related-Party:
§1031(f) two-year holding period tracked, if applicable.
Any related-party transactions flagged for ongoing monitoring.
If Exchange Fails:
Full gain recognized in year of sale.
An amended return if the exchange failed in a prior year.
Acting as a CPA During a 1031 Exchange: Final Thoughts
A 1031 tax-deferred exchange is one of the most technically demanding transactions a CPA will encounter in real estate practice. The difference between a successful exchange and a costly mistake often comes down to early involvement, precise documentation, and a clear understanding of where the CPA's role ends and the QI's begins.
If your clients are holding appreciated real estate investments, the time for advising them on 1031 exchanges is now. At First American Exchange Company, we work with CPAs and tax advisors on 1031 exchanges to support execution from start to finish. Contact our team to learn more about your client’s best options or our role as a Qualified Intermediary.
FAQs
When should a CPA refer a client to a Qualified Intermediary?
If you’re advising a client on a 1031 exchange, as soon as possible. The IRS requires that a Qualified Intermediary be engaged and the exchange agreement executed prior to the closing of the relinquished property.
How do CPAs report a 1031 exchange on the tax return?
CPAs should report a completed 1031 exchange on Form 8824, which documents the properties exchanged, the dates of transfer, the fair market values, any boot received, and the realized versus recognized gain.
What is the §1031(f) related-party rule?
Section 1031(f) restricts exchanges between related parties, as defined under §267(b) and §707(b)(1). When a taxpayer exchanges with a related party, both parties must generally hold their respective properties for at least two years following the exchange.
How is depreciation recapture treated in a 1031 exchange?
The deferred recapture carries forward to the replacement property through a reduced adjusted basis, which also reduces future depreciation deductions.
Can a CPA serve as the Qualified Intermediary?
No. The IRS disqualifies anyone who has served as the taxpayer's agent within the two years preceding the exchange. This includes attorneys, CPAs, investment bankers, and real estate brokers who have provided services to the taxpayer in that period.