Real Estate Tax Calc
When and why you file Form 8824
Form 8824 (Like-Kind Exchanges) must be attached to your federal income tax return for the year you sold the relinquished property — even if the entire gain is deferred. The form is how you report the exchange structure to the IRS, establish the deferred gain, and calculate the replacement property's basis.
If your exchange straddles two tax years (you sold the relinquished property in December but didn't close on the replacement until the following year), you file Form 8824 in the year of the sale of the relinquished property, using the exchange values known at the time. If you file your return before the exchange is complete, file on extension.
Walking through the three parts of Form 8824
Part I — Information about the exchange: Provide the description and address of both properties, the dates they were transferred or received, and whether the exchange involves a related party. You also describe how the exchange was structured and identify your Qualified Intermediary.
Part II — Related party exchange information: If you received property from a related person (or they received yours), additional rules apply, and Part II collects that information. Most arm's-length exchanges skip Part II.
Part III — Realized gain, recognized gain, and basis of like-kind property: This is the computational heart of the form. You calculate: (a) the amount realized on the relinquished property, (b) your adjusted basis, (c) your total realized gain, (d) any boot received, and (e) the recognized gain (the taxable part). The deferred gain is the difference. Your replacement property's basis is computed as: fair market value of replacement property minus the deferred gain plus any gain recognized.
Common errors on Form 8824
Leaving the basis calculation on Line 25 blank — this is how the IRS tracks your deferred gain through future sales. Using FMV instead of adjusted basis for the relinquished property. Forgetting that debt relief counts as boot: if the buyer assumed your mortgage and your replacement property mortgage is smaller, the net debt reduction is included as boot on Part III.
Using the wrong date for the exchange — Part I requires the date you actually transferred the relinquished property (not the date you identified the replacement property or when the QI was funded). Form 8824 instructions are detailed; your tax professional or QI can walk through the numbers with you.
The Part III gain computation, line by line
Part III does the math. In simplified terms: Line 15 reports the fair market value of any boot received (cash plus net debt relief plus non-like-kind property). Line 16 is the FMV of the like-kind replacement property received. Line 17 adds them. Line 18 is your adjusted basis in the property given up, plus any boot you paid and exchange expenses. Line 19 is the realized gain (Line 17 minus Line 18).
Line 20 shows the smaller of the realized gain (Line 19) or the boot received (Line 15) — this becomes the recognized (taxable) gain. Line 22 is the total recognized gain that flows out to Form 4797 or Schedule D. Line 24 is the deferred gain (realized minus recognized). Line 25 is the crucial basis of the replacement property: its FMV minus the deferred gain. Getting Line 25 right is how the IRS — and you — track the deferred gain forward to the next sale.
Where recognized gain and recapture actually get taxed
Form 8824 computes the recognized gain, but the tax is applied on other forms. Recognized gain that is depreciation recapture flows to Form 4797. Under Section 1250, unrecaptured Section 1250 gain (up to 25%) is triggered to the extent of any boot; under Section 1245, ordinary-income recapture on personal-property components is generally recognized to the extent of gain even in an exchange. Recognized gain that is capital in character flows to Schedule D.
A subtle rule: even in a fully deferred real-property exchange, Section 1245 recapture from previously reclassified personal property (for example, from an earlier cost segregation study) may have to be recognized if the replacement property does not include enough like-kind Section 1245 property. Coordinate Form 8824 with Form 4797 so recapture is reported once, in the right character, and not double-counted.
Reporting an exchange that straddles two tax years
Many delayed exchanges begin late in one year and close in the next. You report the exchange on Form 8824 for the tax year in which you transferred the relinquished property. If the replacement property is not yet received when you would normally file, put your return on extension so you can report the completed exchange with final numbers.
If the exchange ultimately fails, or you receive taxable boot spanning the year end, installment-sale rules under Section 453 can apply to the taxable portion, letting you report the recognized gain in the later year when the cash is actually received. Depreciation recapture, however, is always recognized in the year of sale even under the installment method. Flag a straddling exchange for your preparer early — the filing mechanics differ from a same-year exchange.
Multiple properties and multi-asset exchanges
When you relinquish or receive more than one property, you generally still file a single Form 8824 if the properties are exchanged as part of one transaction, aggregating the values — but the instructions require you to attach your own schedules showing the computation, and in some multi-asset exchanges the regulations require grouping assets into 'exchange groups.' If you complete two genuinely separate exchanges in the same year, file a separate Form 8824 for each.
Allocate the total deferred gain and the replacement basis among the received properties in proportion to their relative fair market values. Sloppy allocation creates problems years later when you sell one of several replacement properties, because you must know each property's carried-over basis. Keep the supporting allocation schedule with your permanent tax records.
Related-party exchanges: Part II and the two-year rule
If you exchange with a related party (as defined in Sections 267(b) and 707(b) — close family members, or entities you control), you must complete Part II and observe the two-year holding rule of Section 1031(f). Both you and the related party generally must hold the properties received for at least two years. If either party disposes of its property within two years, the original exchange's deferral is retroactively lost and the gain becomes taxable in the year of the early disposition (with limited exceptions for death, involuntary conversion, or transactions without a tax-avoidance purpose).
The IRS scrutinizes related-party exchanges, especially those structured to shift high basis to a related seller. In each of the two years after the exchange you confirm continued ownership by checking the boxes on that year's Form 8824. If you must report a related-party exchange, document the business purpose and calendar the two-year holding period for both sides.
Recordkeeping, amended returns, and audit exposure
Form 8824 is not a file-and-forget document — it establishes numbers you will need years later. Keep a permanent file containing the completed Form 8824, the settlement statements for both the relinquished and replacement properties, the qualified intermediary's exchange agreement and accounting, your identification letters, and the basis worksheet supporting Line 25. When you eventually sell the replacement property, the gain calculation starts from that carried-over basis, and the IRS may ask you to substantiate it long after the exchange.
If you discover an error — a wrong date, a missing boot item, an incorrect Line 25 basis — file an amended return (Form 1040-X) with a corrected Form 8824 for the affected year. Failing to file Form 8824 at all does not automatically void the exchange, but it removes the IRS's record of your deferral and raises audit risk; the safer course is always to file it in the year of the relinquished-property sale. Common audit triggers include a large deferred gain with no supporting basis schedule, related-party exchanges without the Part II follow-up, and mismatches between the boot reported on Form 8824 and the recapture reported on Form 4797. Consistency across the forms, and a clean paper trail from the QI, are your best protection.
Depreciating the replacement property after the exchange
Form 8824 sets your carryover basis, but a second reporting step trips up many taxpayers: how to depreciate the replacement property going forward. Under Reg. § 1.168(i)-6, the depreciation splits into two pieces on Form 4562. The exchanged (carryover) basis generally continues to be depreciated over the remaining recovery period and using the same method as the relinquished property — as if nothing had changed. Any excess basis from new cash or new debt you added is treated as a separate asset newly placed in service, depreciated over a fresh recovery period (27.5 years residential, 39 years commercial).
The practical result is that one building can carry two depreciation schedules simultaneously. You may instead elect out under Reg. § 1.168(i)-6(i) and depreciate the entire basis as if newly acquired, which simplifies the schedule but usually slows your deductions. Whichever you choose, do it in the year of the exchange — the default two-schedule treatment applies automatically if you say nothing, and reconstructing it years later is painful.
A failed or year-straddling exchange: the installment-sale rescue
If you sell the relinquished property, the qualified intermediary holds the cash, and the exchange then fails — you do not identify or close on replacement property — you receive the funds back, often in the following tax year. Reg. § 1.1031(k)-1(j)(2) allows a taxpayer who had a bona fide intent to exchange to report that gain under the installment method of Section 453, so the tax lands in the year you actually receive the cash rather than the year of the sale. You report it on Form 6252 instead of (or alongside) Form 8824.
This matters for a sale that closes late in the year: if your 180-day period runs into the next year and the exchange collapses, you are not automatically stuck recognizing the gain in the sale year. But the rescue does not defer depreciation recapture — Section 453(i) forces all recapture into the year of sale regardless. And it applies only to a genuine attempted exchange, not to a sale you dressed up as one after the fact. Coordinate with your preparer so the return reflects the correct year and the recapture is not overlooked.
State reporting and clawback forms
Form 8824 is federal. Most states that have an income tax start from federal figures, so the deferral usually flows through automatically — but a handful require extra reporting. The most important is California's Form FTB 3840: if you exchange California property for replacement property outside California and defer the gain, California requires you to file FTB 3840 in the year of the exchange and every year thereafter to track the deferred California-source gain, until you recognize it in a taxable sale. Miss the annual filing and California can estimate and assess the deferred gain.
Oregon, Massachusetts, and Montana operate similar tracking or clawback regimes for interstate exchanges. Even in fully conforming states, confirm whether a separate state form or addback is required, and keep the state filings in the same permanent file as your Form 8824 — the state's memory of your deferred gain can outlast your own.
Tax-software pitfalls with Form 8824
Consumer tax software handles a 1031 poorly more often than people expect, and the errors are expensive because they compound. The two most common: the program computes the wrong Line 25 carryover basis (or lets you type a number that does not tie to the settlement statements), and it fails to set up the two-schedule depreciation on the replacement property, instead depreciating the full purchase price as if it were a normal acquisition — which overstates your deductions and understates the gain you will owe at sale.
Before you file, reconcile three things by hand: the realized gain and any recognized boot, the Line 25 basis (fair market value of the replacement minus deferred gain, plus any recognized gain), and the first-year depreciation, which should reflect the carryover schedule plus only the excess basis. If those numbers do not reconcile with your QI's closing package, do not file — a complex exchange is a reasonable place to bring in a professional preparer, since a mis-entered basis quietly follows the property for its entire holding period.
Frequently asked questions
Do I have to file Form 8824 if the entire gain is deferred?
Yes. Form 8824 is required for every 1031 exchange, even when no gain is recognized. It establishes your replacement property's carryover basis.
What if I miss filing Form 8824?
File an amended return (Form 1040-X) as soon as you discover the omission. A failure to file Form 8824 doesn't necessarily invalidate the exchange, but it creates an IRS audit risk.
Where does the taxable boot show up after Form 8824?
Gain recognized in the exchange (boot) appears on Form 4797 (for depreciation recapture) and/or Schedule D (for capital gain), depending on the character of the gain.
What is Line 25 on Form 8824?
Line 25 is the basis of the like-kind replacement property you received — its fair market value minus the deferred gain (plus any recognized gain). It carries your deferred gain forward and is essential for computing tax when you eventually sell the replacement property.
How do I report boot on Form 8824?
Boot received (cash, net debt relief, and non-like-kind property) is entered in Part III. The recognized gain — the smaller of realized gain or boot — flows to Form 4797 for depreciation recapture and to Schedule D for capital gain.
Do I file a separate Form 8824 for a related-party exchange?
You use the same form but must complete Part II and observe the two-year holding rule. In each of the two following years you confirm continued ownership; an early disposition by either party retroactively triggers the deferred gain.
How do I depreciate the replacement property after a 1031?
Under Reg. § 1.168(i)-6 the carryover basis keeps depreciating on the relinquished property's remaining schedule and method, while new cash or debt (excess basis) is a separate asset depreciated fresh over 27.5 or 39 years — reported on Form 4562. You can elect to treat the whole basis as newly placed in service, but that usually slows your deductions.
What if my 1031 exchange fails after the sale already closed?
If you had a genuine intent to exchange and the QI returns your funds in a later year, you can generally report the gain under the installment method (Section 453) on Form 6252 in the year you receive the cash. Depreciation recapture, however, is still recognized in the year of sale under Section 453(i).
Do I need to file a state form for a 1031 exchange?
Often the federal deferral flows through automatically, but some states require extra reporting. California's Form FTB 3840 must be filed the year of the exchange and every year after when you exchange California property for out-of-state property, tracking the deferred California gain until you sell. Oregon, Massachusetts, and Montana have similar rules.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.