To most taxpayers (sellers) of either business or investment held properties the primary
benefit to them when taking advantage of Section 1031 of the Internal Revenue Code is
to defer both federal and in most cases state income tax based on their gain. This process
allows taxpayers the opportunity to PAY NO CAPITAL GAINS TAX when disposing. The requirements to receive this favorable tax treatment includes the taxpayer who is
disposing of either business or investment held property, needs to acquire other business
or investment held property with the proceeds and must acquire at least the value that
their disposing of in order to PAY NO CAPITAL GAINS TAX. The process of a
deferred Exchangemust be handled through a professional Qualified Intermediary, and
the transaction must be completed within a six month period from the closing of the
relinquished property. Now that you have completed a successful deferred Exchangecomplying to all
necessary requirements. Such as meeting the Identification Period requirement, meeting
the ExchangePeriod requirement, using a professional Qualified Intermediary who either
had legal title conveyed or the rights of the contracts of both the relinquished and
replacement properties assigned, to the professional Qualified Intermediary. Making sure
the Qualified Intermediary was not a "disqualified person", that there wasn't either "actual
or constructive" receipt of the net proceeds and that all the necessary Exchangedocuments were executed , how do we report this type of transaction to the Internal
Revenue Service?
Reporting an Exchange
All Exchanges must be reported on both
(1) IRS Form 4797, "Sale of Business Property," for depreciable property or Schedule D, "Capital Gains and Losses," for nondepreciable property, and (2) IRS Form #8824. Form #8824, "Like-Kind Exchanges," was first required for transactions occurring in
1991. Part I of Form #8824 requests information on the Exchange, including:
1.) A description of the relinquished property and the replacement property,
2.) The date the relinquished property was acquired and
Exchanged,
3.) The date of the identification of the replacement
property, and
4.) The date of the receipt of the replacement property.
Form #8824 also requests additional information on related
party Exchanges. The realized gain or loss, recognized gain,
and the basis of the replacement property are computed in
Part II of form #8824. The computation only applies to
Exchanges of property of one Exchangegroup or type. The
computations for Exchanges of multiple Exchangegroups or
types of properties must be made on a separate sheet
attached by the taxpayer. Also, the taxpayer must attach a
separate sheet with computation of gain or loss if the
taxpayer transferred and received other property along with
the like-kind property. The last thing that you want to do
is go through the correct steps of implementing a deferred
Exchangeand not report it properly.
