Although a successful 1031 exchange allows you to defer the capital gains tax on the sale of your business/investment property, the IRS still requires you to report the exchange transaction on your tax return.
When to Report the 1031 Exchange Transaction…
- The exchange is reported on your tax return for the tax year that you sold the Relinquished Property, even if the exchange was not completed during the same year.
- For example, if you sell the Relinquished Property in October 2016 and purchase the Replacement Property in March 2017, then the exchange must be reported on your 2016 tax return (not your 2017 tax return).
- If you do not purchase the Replacement Property by the income tax filing deadline (April 15), then you will need to file for an extension using Form 4868.
- Filing the tax return before the exchange is completed (i.e., purchasing the Replacement Property) automatically ends the whole exchange and the capital gains tax is then owed.
- State income tax returns should also be addressed in this situation and you should consult with your tax advisor about the specifics of your state reporting requirements.
How to Report the 1031 Exchange Transaction…
- You will still receive a 1099-S from the sale of your Relinquished Property although you are conducting a 1031 exchange. Your settlement agent is required to file this document upon the completion of every sale. Do not worry.
- Your 1031 exchange will be reflected in your income tax return filing in Form 8824. This Form lets the IRS know that you did an exchange on that sale and that the sale may have deferred your tax liability.
- For line-by-line instructions on how to complete Form 8824, you can download the IRS instructions here.
- Note that if you complete more than one 1031 exchange in the tax year, you must file a separate Form 8824 for each exchange.
Of course, you should always consult with your tax advisor about your situation and how and when to file. The information contained herein is not meant to be tax advice or legal advice given by 1031trx LLC or its members. To set up a 1031 exchange, contact us here!