How Do I Report a 1031 Exchange on My Tax Return?

You are probably aware that it is tax season again. It is during this time of the year that we receive quite a number of questions and inquiries regarding investors' 1031 tax deferred exchanges that were completed during the previous tax year.

Common 1031 Exchange Reporting Questions
Questions such as the following are very common:

• How do I report my 1031 tax deferred exchange on my income tax return?
• What IRS Forms do I use to report a 1031 exchange, including the tax deferral, boot, capital gain, etc.
• I did a partial 1031 tax deferred exchange and also have to report boot. What IRS Form do I use to report the boot?
• Is my Qualified Intermediary required to report the 1031 tax deferred exchange to the Internal Revenue Service on my behalf?
• I earned interest income on my 1031 exchange balance while it was held by the Qualfiied Intermediary. How do I report that interest to the IRS?

1031 Tax Deferred Exchange Forms and Documents Library
We have created a 1031 exchange forms and documents library and posted many of the Federal and some state income tax forms that you will need to report your real estate transactions, including your 1031 tax deferred exchange transactions.

Answers to Your Questions
The general answers to the questions listed above are as follows. However, it is very important that you have a professional tax advisor complete the forms on your behalf.

Reporting the 1031 Exchange
You can read about the reporting requirements for the sale, disposition or exchange of property in IRS Publication 544. 1031 tax deferred exchanges are reported on Internal Revenue Service Form 8824. IRS Form is generally updated each year, so make sure that you have the most recent version available.

Reporting Taxable Capital Gain from a 1031 Exchange
Boot will trigger depreciation recapture and capital gain income tax liabilities. These items are reported on Internal Revenue Service Form 4797.

Reporting Failed 1031 Exchanges
This issue can get a little tricky, so always have your tax advisor assist you. A failed 1031 exchange is reported in the year in which the investor had the right to his or her 1031 exchange proceeds. It might be taxable as an installment sale and taxed in the following year depending on the circumstances. IRS Form 6252 would be used under these circumstances.