Form 8824

A Form 8824 (Like-Kind Exchanges) is filed whenever you swap one business or rental property for another qualifying property. It calculates how much of your gain you recognize now, how much defers to the replacement property, and what your basis becomes.

The Section 1031 exchange in brief

Under IRC Section 1031, if you trade real property (or certain personal property) for property of “like-kind,” you do not pay tax on the gain. The gain defers. You hold the new property, and the tax obligation moves forward to whenever you eventually sell that property for cash.

Without a 1031 exchange, selling a rental apartment for $500,000 when your basis is $300,000 triggers a $200,000 gain and an immediate tax bill. With a 1031 exchange into another qualifying property, that same $200,000 deferred gain goes into the new property’s basis, and you pay no tax now.

Form 8824 is where the math happens.

What qualifies as like-kind

For real property (real estate), the definition is broad: almost all U.S. real property is like-kind to almost all other U.S. real property. A rental apartment traded for raw land, or commercial office space for agricultural property—all qualify. The property types do not need to match.

Personal property rules are more restrictive. A truck traded for another truck may qualify; a truck for a computer does not. Real property and personal property cannot be mixed in a single 1031 exchange. Most 1031 exchanges involve real estate.

Also critical: foreign property is not like-kind to U.S. property. If you trade U.S. real estate for land in Mexico, Section 1031 does not apply, and the gain is taxable.

The 45-day identification period

You must identify replacement property within 45 calendar days of closing on the relinquished property (the one you sell). The identification must be in writing, usually delivered to the qualified intermediary handling the exchange.

The IRS permits identifying up to three replacement properties without regard to their total value. Alternatively, you can identify more than three properties, provided their total value does not exceed 200% of the relinquished property’s value. These rules are strict—missing the deadline disqualifies the entire exchange.

The 180-day acquisition period

Once you identify replacement property, you have 180 calendar days total (from the close of the relinquished property) to acquire (close on) the replacement property. You do not need to close on all identified properties, only one or more that total at least the value you deferred.

If the relinquished property close coincides with a like-kind exchange timeline that overlaps a tax-year boundary, the IRS may allow additional time in specific cases, but you cannot rely on this. File an extension if needed to keep your timeline clear.

Form 8824 Part I: the relinquished property

You describe the property you sold:

• Description of the real property
• Date acquired
• Date relinquished (when you close on the sale)
• Basis in the property
• Sale price (proceeds)
• Gain realized (proceeds minus basis)

This is straightforward—it’s the property leaving the exchange.

Part II: the replacement property and boot

This is where the form calculates what you keep and what you defer.

Fair market value of replacement property received: the value of the new property you acquire.

Boot received: any cash or other non-like-kind property you receive in the exchange. If you sell property worth $500,000 and receive a replacement property worth $450,000 plus $50,000 cash, the cash is boot. Boot triggers immediate gain recognition.

The form calculates:

• Realized gain: proceeds minus basis
• Recognized gain: generally, the lesser of realized gain or boot received
• Deferred gain: the gain you do not recognize now (realized gain minus recognized gain)

Carryover basis: the deferred gain lives on

When you trade properties under Section 1031, the deferred gain does not disappear—it flows into your basis in the replacement property.

New basis = FMV of replacement property − deferred gain

If you trade property with a $300,000 basis for $500,000 in replacement property, your realized gain is $200,000. If you receive no boot, all $200,000 defers. Your new basis is $500,000 − $200,000 = $300,000.

This is counterintuitive but correct: you step into the new property with the same economic “cost basis” as the property you gave up. The tax obligation is embedded in the new property’s low basis, waiting for you to sell.

If you receive $50,000 boot (cash), your recognized gain becomes $50,000, and the deferred gain is $150,000. Your basis in the replacement property is $500,000 − $150,000 = $350,000.

Multiple property exchanges: Part III

If you’re exchanging multiple properties or receiving multiple replacement properties, Part III tracks each property separately and sums the results.

This is common in commercial real estate swaps, where one large property is traded for two or three smaller ones (or vice versa). Each property’s basis is calculated individually.

Limitations: why 1031 exchanges matter less now

Prior to the Tax Cuts and Jobs Act of 2017, personal property 1031 exchanges were common—trading vehicles, equipment, or collectibles tax-free. The Act eliminated this benefit; only real property exchanges now qualify.

This is a major shift. Most 1031 planning now focuses on real estate only.

Additionally, Section 1031 is not a basis step-up. If you exchange property and later die holding the replacement property, your heirs receive a stepped-up basis based on the property’s value at your death—they do not inherit the deferred gain. This is one reason some investors eventually sell property in taxable transactions late in life: to let the basis step up at death.

Interaction with depreciation recapture

If you claimed depreciation on the relinquished property, that depreciation recapture tax applies even in a 1031 exchange. Form 4797 handles the recapture calculation; Form 8824 handles the deferred gain from the appreciation above depreciation recapture.

So if you traded rental property with $100,000 of depreciation claimed and $200,000 of appreciation, your Section 1031 exchange defers the $200,000 of gain, but $100,000 of it is depreciation recapture (taxed at ordinary rates on Form 4797), and $100,000 remains deferred long-term capital gain.

Qualified intermediaries and the rules you cannot break

A qualified intermediary is a third party that holds the proceeds from the sale and uses them to acquire the replacement property. The IRS is strict: if you receive the cash directly and then buy replacement property, Section 1031 does not apply—no matter how quickly you close or how carefully you track the funds.

The intermediary does not need to be a bank or major corporation, but they must meet IRC qualifications. Using a qualified intermediary is not optional; it is mandatory for Section 1031 treatment.

See also