How to Report a 1031 Exchange on IRS Form 8824 (With a Worked Example)

Which tax year the form belongs to

Clients ask me this constantly: "I sold in November and bought in January of the next year, so which return does it go on?" The answer is the tax year in which you sold the relinquished property. Form 8824 is filed with your income tax return for the year the old property closed, even when the replacement property closes in the following calendar year. That is normal for any exchange that straddles a year-end, and it is one reason your 180-day window can legitimately run into the next tax year. If your replacement purchase will close after your filing deadline, you typically need to file an extension so the return can reflect the completed exchange. The form attaches to your 1040 (or the entity return that holds the property), and you file one Form 8824 per exchange.

If you want a refresher on how those two clocks run, my 1031 exchange timeline page lays out the 45-day and 180-day deadlines that frame everything on this form.

Part I: describing the properties and the key dates

Part I is the narrative part of the form. You describe the property you gave up and the property you received in plain language: address, type of property, and the like-kind nature of the exchange. Real property held for investment is exchanged for other real property held for investment, so the descriptions should make that intent obvious.

The dates are where people get sloppy. Part I asks for the date the relinquished property was actually transferred, the date you identified your replacement property (your 45-day identification date), and the date you received the replacement property (your 180-day acquisition date). On the current form these land on lines 5 and 6. The 45-day and 180-day periods both run from the closing of the relinquished sale and run simultaneously, so double-check that your identification date is no later than day 45 and your acquisition date is no later than day 180. If those dates do not line up with the rules, the form is the first place the IRS will notice.

Part III: the gain math that actually matters

Part III is where the exchange gets quantified. This is the engine of the whole form, and it answers two separate questions: how much gain you realized, and how much gain you must recognize (pay tax on) this year. In a clean, fully deferred exchange with no boot, you realize gain but recognize zero. The deferred gain does not disappear; it rides along into the basis of your new property.

The form walks you through your realized gain, any recognized gain triggered by boot, and finally your carryover basis in the replacement property. The core principle: your basis in the new property is generally your old adjusted basis, plus any additional cash you put in and any new gain you recognized, minus any boot you received. That is how the deferred gain gets preserved for the future.

A concrete worked example

Let me put real numbers on it. Say you sell a rental for $500,000. Your adjusted basis in it was $200,000 (original cost minus depreciation you took). Your realized gain is $300,000. You roll the entire $500,000 of net proceeds into a replacement property worth $600,000, adding $100,000 of your own cash to close.

Because you reinvested all of the proceeds and took no cash out, you recognize $0 of gain this year. The $300,000 of gain is deferred. Your basis in the new $600,000 property is not $600,000 — it is your carryover basis: $200,000 old basis + $100,000 new cash = $300,000. The $300,000 gap between your $300,000 basis and the $600,000 value is exactly the deferred gain, sitting in the property waiting for a future sale (or another exchange). Run your own numbers through my 1031 exchange calculator before you hand anything to your CPA.

How boot gets reported

Boot is anything you receive in the exchange that is not like-kind property — most commonly cash you pulled out, or debt relief that is not replaced. Boot is the trigger for recognized gain. On Form 8824 you report the fair market value of any boot received, and you recognize gain to the extent of that boot (up to your total realized gain).

Back to the example: if instead of reinvesting all $500,000 you kept $50,000 in cash, that $50,000 is boot. You would recognize $50,000 of gain this year and defer the remaining $250,000. The recognized gain flows from Form 8824 over to Schedule D and Form 4797, and it is here that any depreciation recapture gets sorted out — recaptured depreciation is taxed at its own rate and is reported before the rest of the capital gain. This is precisely the part you do not want to estimate on your own.

The most common Form 8824 mistakes

In my experience the same errors show up year after year. The big ones: filing it in the wrong tax year (it goes with the year of the relinquished sale, not the replacement purchase); treating the replacement value as the new basis instead of carrying over the old basis; forgetting boot, especially debt relief, which is boot even when no cash changes hands; and mismatched dates between the form and the actual closing and identification records. I also see people forget that depreciation recapture has to be addressed even in a fully deferred exchange. None of these are fatal if caught, but all of them invite questions.

Do this with your CPA — here is what to hand them

Form 8824 is a team document. I am the qualified intermediary who makes the exchange happen; your CPA is the one who reports it correctly. To make their job easy, hand them: the settlement statements for both the relinquished sale and the replacement purchase, your exchange agreement and identification letter from your QI, the closing dates for both transactions, your adjusted basis in the old property (including depreciation taken), and the amount of any cash or debt relief you walked away with. With that packet your accountant can complete the form in one sitting. If you give them a shoebox of papers in April, expect a scramble.