Tax Free Exchange ez123...
Trade or business investment property
Like Kind - can be Improved for Land
Name on Title MUST be the exact same
Re Investment must be Equal / Greater
IRS Form 8824
Property used for personal use - home or vacation home
US Property does not qualify for Foreign Property
Improvements without Land for Real Property
You cannot act as your own facilitator

While a like-kind exchange does not have to be a simultaneous swap, you must meet 2 time limits or the entire gain will be taxable. These limits cannot be extended except in the case of presidentially declared disasters.

1) 45 days from the date you sell the relinquished property you must identify potential replacement properties. It must be in writing, signed by you and delivered to a person involved in the exchange, ie the seller of the replacement property or a qualified intermediary. Notice your attorney, real estate agent, accountant or similar persons acting as your agent is not sufficient.

Replacement properties must be clearly described in the written identification. This means a Legal Description, street address or distinguishable name. Follow the IRS guidelines for the maximum number and value of properties that can be identified.

2) The replacement property must be received and the exchange completed no later than 180 days after the sale of the exchanged property or the due date (with extensions) of the income tax return for the tax year in which the relinquished property was sold, whichever is earlier. The replacement property received must be substantially the same as property identified within the 45-day limit described above.

Computing the basis in the new property?

You and your tax representative MUST adjust and track basis correctly to comply with Section 1031 regulations. Gain is deferred, but not forgiven, in a like-kind exchange. You MUST calculate and keep track of your basis in the new property acquired.

The basis of property acquired in a Section 1031 exchange is the basis of the property given up with some adjustments. This transfer of basis from the relinquished to the replacement property preserves the deferred gain for later recognition. A collateral affect is that the resulting depreciable basis is generally lower than what would otherwise be available if the replacement property were acquired in a taxable transaction.

When the replacement property is ultimately sold (not as part of another exchange), the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.

How do you report Section 1031 Like-Kind Exchanges to the IRS?

You MUST report an exchange to the IRS on Form 8824, Like-Kind Exchanges and file it with your tax return for the year in which the exchange occurred.

Form 8824 asks for:

  • Descriptions of the properties exchanged
  • Relationship between the parties to the exchange
  • Gain / loss on sale of other (non-like-kind) property given up
  • Adjusted basis of like-kind property given up; realized gain
  • Dates that properties were identified and transferred
  • Value of the like-kind / other property received
  • Cash received or paid; liabilities relieved or assumed

If you do not specifically follow the rules for like-kind exchanges, you may be held liable for taxes, penalties, and interest on your transactions.

Consult a tax professional or refer to IRS publications listed below for additional assistance with IRC Section 1031 Like-Kind Exchanges.

IRS References / Related Topics

Publication 544, Sales and Other Dispositions of Assets

Form 8824, Like-Kind Exchanges (PDF)

Form 4797, Sales of Business Property