1031 Exchange Tax Planning: What to Review During Tax Season

If you sold investment property in an exchange last year, it gets reported on your tax return even though the gain is deferred. A deferred gain isn't an unreported one. Here's what to go over with your CPA.

Form 8824 goes with the year of the sale

Every exchange is reported on IRS Form 8824, filed with your return for the year your relinquished property sold. That's true even if you bought your replacement property the following year. At the end of your exchange, we send you a client settlement statement with a full reconciliation of funds, an outline of all your critical dates and transaction timelines, and your closing statements, packaged so your CPA has everything they need to report the exchange.

Fall sales may need an extension

Your exchange period ends on day 180 or on your tax return due date, whichever comes first. For individuals, that matters for any sale that closed after about October 17. Day 180 lands after April 15, so you need to complete the exchange before then or your CPA needs to file an extension to keep your full exchange period. With the extension, you have up to and including day 180 to complete your replacement purchase or purchases.

Partnerships and S corporations have a March 15 due date, so they run into this with sales after about mid-September.

If you're still in the middle of an exchange, make sure your CPA knows before they file anything.

Your basis and depreciation carry over

Your replacement property doesn't start fresh. The basis from the property you sold carries over, adjusted for any additional cash you put in or any gain you recognized. Depreciation continues from there. Getting this right now saves headaches when you eventually sell.

Any boot is taxable this year

If you received cash at closing, kept money left over after the exchange, or bought less than you sold, that portion is taxable. It's called boot. Depreciation recapture is taxed first. Your CPA will calculate it on Form 8824.

California keeps track if you bought out of state

If you sold California property and bought outside California, you'll file FTB Form 3840 with the Franchise Tax Board every year until you sell the replacement property. California will tax the deferred gain when you eventually sell without exchanging.

Planning another exchange this year?

Tax season is a good time to talk with your CPA about any sales you're considering. If you think you'll sell this year, reach out before you list so we can talk through timing. When you're under contract, put us in touch with your closing agent and we can get most exchanges set up the same day.

APX 1031 is a Qualified Intermediary. We don't provide tax or legal advice; talk with your CPA or attorney about your situation.