ProWeb: Form 8824 - Like Kind Exchanges
IRS Form 8824 reports like-kind exchanges of real property, deferring gain and calculating basis and taxable gain. A like-kind exchange involves trading business or investment real property for similar property under IRC section 1031, with strict rules on timing, taxpayer identity, and related parties. Pro Web guides users through entering exchange details, including property descriptions, dates, and gains. Related IRS instructions and publications provide further guidance.
IRS Form 8824 is used to report an exchange of real property for real property of a like kind and to calculate how much of the gain is being deferred, the basis in the acquired property, and the taxable gain to be reported in the current year.
What is a Like-Kind Exchange?
A like-kind exchange occurs when an owner exchanges business or investment real property for similar property of a like kind, and under IRC section 1031 no gain or loss is recognized. Real properties are generally considered to be like-kind regardless of whether they are improved or unimproved, but they both must be located in the United States and the property must not be treated as inventory held for sale.
A like-kind exchange might also include not like-kind property, such as cash, liabilities, or personal property, and the gain (not the loss) on this property is recognized in the return. A tax return may include both deferred and recognized gain in the same transaction when a taxpayer exchanges for like-kind property of lesser value.
Who Qualifies for a Like-Kind Exchange?
Individuals, C corporations, S corporations, partnerships (general or limited), limited liability companies, trusts, and any other taxpaying entity may set up an exchange of business or investment property under section 1031.
What Qualifies as a Like-Kind Exchange?
The exchange of real property for the same kind of real property is the most common type of nontaxable exchange. To be a like-kind exchange, the real property traded and the real property received must be both a qualifying property and like-kind property. Both properties must meet certain requirements:
- Both properties must be held for use in a trade or business or for investment.
- Both properties must be similar. Like-kind properties are of the same nature, character, or class. Quality or grade does not matter. For example, property that is improved with a rental house is like-kind to vacant land as both are for investment purposes.
- An exchange is distinguished from simply selling one property and using the proceeds to purchase another property (which is considered a taxable transaction.)
- The disposition of property and the acquisition of replacement property must be mutually dependent parts of an integrated transaction. While the completion of the disposition and the acquisition do not necessarily occur at the same time, they must meet strict timelines and be mutually dependent.
These two kinds of property are also treated as real property for section 1031 purposes:
- Stock in a cooperative housing corporation.
- Shares in a mutual ditch, reservoir, or irrigation company described in section 501(c)(12)(A) if, at the time of the exchange, the shares were recognized by the highest court of the state in which the company was organized, or by a state statute, as constituting or representing real property or an interest in real property.
What is the Same Taxpayer Rule?
The taxpayer who owns the relinquished property mush be the same taxpayer who takes ownership of the replacement property, i.e., the same SSN or EIN on each side of the transaction. A change in the taxpayer identity between the two properties in an exchange does not qualify as a like-kind exchange. This includes a taxpayer relinquishing property and adding a spouse to the acquired property.
What are date restrictions to a Like-Kind Exchange?
There are two separate date requirements:
(1) A 45-day written notification requirement, including taxpayer’s signature, stipulating the following:
- The property being received must be identified and designated as replacement property.
- Real property should be described using a legal description, street address, or distinguishable name.
- The taxpayer may identify up to 3 potential properties.
- The document must be signed by all parties in the exchange.
- The signed document is sent to a designated facilitator (either mailed, faxed, or delivered).
If the exchange is fully completed within 45 days, it is considered to have met the written notification requirement.
(2) The property must be received by the earlier of the following dates.
- The 180th day after the date the taxpayer transferred the property given up in the exchange.
- The due date (including extensions) of the tax return for the year in which they transferred the property given up.
What Constitutes a Related Party?
Special rules apply to exchanges between related parties. If the exchange is being structured to avoid related-party rules, it is not a like-kind exchange and should not be reported on Form 8824 but instead should be treated as a sale. (See 26 U.S.C. § 267(b) for the definition of a related party.)
A related party includes:
- A family relationship such as a spouse, child, grandchild, parent, grandparent, brother, sister.
- A related corporation, S corporation, partnership, trust, estate, or tax-exempt organization.
Reporting a like-kind exchange in ProWeb
To enter a like-kind exchange, from the Federal Section of the tax return (Form 1040) select:
- Income
- Other Income
- Form 8824
Begin by entering the information in Parts I and III of the form.
Whose form is this? - For a MFJ return, indicate if the form belongs to the taxpayer, spouse, or both.
Description of Property Given Up
Generally only real property needs a description, including the address and type of property, but also describe property being disposed of that was part of a previously reported related party like-kind exchange.
Description of Property Received
Generally only real property needs a description, including the address and type of property, but also describe property being disposed of that was part of a previously reported related party like-kind exchange.
Date like-kind property given up was originally acquired
MM/DD/YYYYEnter the acquisition date of the property given up.
Date you transferred your property to other party
MM/DD/YYYYEnter the date the property given up was transferred to the other party.
Date like-kind property received was identified
MM/DD/YYYYEnter the date of the written identification of the like-kind property the taxpayer received. If the taxpayer received the property before the end of the 45-day written identification requirement period, enter the date they received the replacement property.
Date you received the property from other party
MM/DD/YYYYThis is the date the taxpayer received the like-kind property from the other party. The property must be received by the earlier of:
- The 180th day after the date the taxpayer transferred the property given up in the exchange.
- The due date (including extensions) of the tax return for the year in which the taxpayer transferred the property given up.
Cash & fair market value of other (not like-kind) property received
$The value entered will represent the amount of cash ("boot") and other property the taxpayer received separate from the like-kind property they received. If the property given up is subject to a debt (or liability) and the other party involved in the exchange is assuming the debt, this debt is also treated as boot. If the two parties each assume the other's debt, the taxpayer is only treated as receiving boot by the amount the debt they gave up exceeds the debt they took on. There are specific guidelines of when to include liabilities assumed by the other party - see the Form 8824 instructions for more info.
Other property received description
If you entered an amount in the previous field, describe the property received here.
Adjusted basis of like-kind property you gave up
$The cost of the property the taxpayer gave up less accumulated depreciation.
Ordinary income under recapture rules
$If there is a realized gain and the taxpayer disposed of section 1245, 1250, 1252, 1254, or 1255 property, they may be required to recapture as ordinary income part or all of the realized gain. See the IRS Form 8824 Instructions for this line, as well as Publication 544 for more detailed info.
Basis of like-kind section 1250 property received
$If section 1250 property was received, enter its basis.
Basis of like-kind section 1245, 1252, 1254, and 1255 property received
$If section 1245, 1252, 1254, or 1255 property was received, enter its basis.
Basis of like-kind intangible property received
$If intangible property was received, enter its basis.
Carry income to - Select the appropriate form to carry the income:
Choose Schedule D for non-business property, Form 4797 for business property, or Form 6252 for an installment sale.
Did you give up property that was like-kind? - Select Yes or No. If No, additional info is needed:
Fair market value of other property given up
$If the taxpayer also pays out cash, or gives up other property that is not like-kind, enter the fair market value.
Other property given up description
Describe the not like-kind property.
Adjusted basis of other property given up
$Enter the book value of the not like-kind property (cost basis less accumulated depreciation).
Click Continue to move forward to Related Party Exchange Information.
Related Party Exchange Information
Was the exchange made with a related party? - Select Yes or No as appropriate. A related party includes the taxpayer's spouse, child, grandchild, parent, grandparent, brother, sister, or a related corporation, S corporation, partnership, trust, estate, or tax-exempt organization.
If Yes, additional info is needed:
Relative's name
Enter the related party's name.
Country, Address, ZIP code, City, State - Enter the related party's address.
Relative's ID number - Enter related party's TIN.
Relative's relationship to you
Describe the relationship (15 characters maximum).
Related party sold or disposed of property received from you - Select Yes if during the tax year (and before the date that is 2 years after the last transfer of property that was part of the exchange) the related party sold or disposed of any part of the like-kind property received from the taxpayer (or an intermediary) in the exchange.
Did you sell or dispose of the like-kind property you received - Select Yes if during the tax year (and before the date that is 2 years after the last transfer of property that was part of the exchange) the taxpayer sold or disposed of any part of the like-kind property they received.
Disposition Exception - If the answer to either of the previous two questions is Yes and there is an exception to the related party rules, select from the drop down menu which exception applies:
