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Exchange to the “Tax Man”

By:  Susan Goldcamp EA

You’ve successfully exchanged your property for another property with the help of your facilitator. What does the IRS need to know and when?

This is general information. None of this is meant to substitute for the advice of your own tax professional. 

The Form 8824 was created to help you figure out what, if any part of your exchange is taxable and what you will use as the basis of your new property. Basically, any cash or assets that are not like-kind that you give up will be subtracted from any cash, assets or benefits you receive that are not like-kind and will be currently taxable. Any gains that are not currently taxable will be subtracted from the cost of your new property when calculating its basis.

The Form 8824 will be attached to your individual, partnership, or corporate tax return for the year in which your former property is relinquished (sold, given up, transferred, exchanged).

For example, if you transfer title of a property (sell) in December 2010 and do not acquire (purchase) your new property until 2011, the Form 8824 will be attached to your 2010 tax return. If the acquisition (purchase) isn’t expected to take place until after the due date of your tax return (generally March 15 for a corporation and April 15 for an individual or partnership) you may request an automatic six month extension of time to file for your corporation or yourself. Only five month extensions are granted to partnerships. 

An extension of time to file is NOT an extension of time to PAY. If you expect to owe taxes, send a payment with your request for extension of time to file. This will help you avoid late payment penalties and interest. Penalties and interest combined for late paying of taxes are normally around 1% per month of the outstanding balance.

If you made more than one like-kind exchange you may show a summary on the Form 8824 and attach a detailed list or file a separate Form 8824 for each exchange. Also, if you exchanged property that was not like-kind in addition to property that is like-kind you should attach a statement showing how you arrived at the realized and recognized gains that will be entered on Line 19 of the Form 8824.  

I would normally recommend that a separate 8824 be completed for each exchange. This way, we can be certain that the IRS has all the information it needs for each transaction. Your tax accountant may have a compelling reason to do a summary instead.

Specific instructions

Lines 1 and 2

Describe the property that is like-kind and being exchanged. For real estate, enter the address and type of property.
Example:
937 Fritztown Rd, Reading, PA / Office Building

For other types of property involved in a like-kind exchange (equipment, vehicles etc.), enter a short description.
Example:
Data processing equipment

Line 3

Enter the date the property you gave up (“sold,” transferred, relinquished) was originally acquired (purchased, inherited etc.).

Line 4

Enter the date the property you gave up (“sold,” transferred, relinquished) was transferred to the other party.

Line 5

Enter the date the like-kind property that you received (“purchased,” acquired) was identified by written notice to another party (1031 CORP.).

Line 6

Enter the date you actually received (purchased, acquired) the like-kind property from other party.

Line 7

Will be checked “No” unless the exchange is happening between related parties.

Most folks will then skip to

Line 12

Enter the Fair Market Value of any other (not like-kind) property given up. 
Example:
If office furniture was left in the commercial building enter the Fair Market Value. This is usually what this furniture could sell for at a thrift store, on line, or at a used furniture store. Let’s say the FMV of the furniture is $5,000.

Line 13

Enter the adjusted basis of this other property. 
Example:
Office furniture cost:  $12,000 less depreciation expense deducted $9,600 = basis of $2,400.

Line 14

Show the “gain” you had from this -- $5,000 (FMV) minus $2,400 (adjusted basis) = $2,600 gain.

Line 15

Enter cash received and the Fair Market Value (FMV) of other property received, plus net liabilities assumed by other party, and subtract your other expenses related to this transaction.
Example:
At settlement, you are given a check for $10,000 and a vehicle worth $7,000 along with the real estate you received and the party receiving your former property assumes a mortgage on that former property with an outstanding balance of $20,000. The FMV of the other not like-kind property ($5,000) will be subtracted and other expenses (ex: lets say $6,500 of closing costs and legal fees) directly related to the transaction will be subtracted.
Line 15 would show: $25,500
($10,000 cash + $7,000 vehicle + $20,000 debt assumed – $5,000  from Line 14 – $6,500 closing and legal costs = $25,500)

Line 16

Enter the FMV of like-kind property you received.  This would normally be the “purchase price” of the real estate you’re acquiring (buying, receiving).  Let’s say your new building and land are “purchased” for $450,000.

Line 17

Enter the total of the property (like-kind and otherwise) you now have—Line 15 + Line 16 = $475,500.

Line 18

Adjusted basis of the like-kind property you gave up less amounts paid to other parties.
Example:
Previous property was purchased for $285,000 less depreciation taken in previous years $29,000 = adjusted basis of $256,000.

Line 19

This is the realized gain.  Subtract Line 18 from Line 17.  $475,500 – $256,000 = $219,500,

Line 20

Enter the smaller of Line 15 ($25,500) or Line 19 ($219,500).

Line 21

Enter Ordinary Income under recapture rules. This would represent the deprecation previously taken on business assets exchanged, up to the recognized gain.  This normally does not apply to real estate held for investment.

Line 22

This is Line 20, $25,500 less Line 21, $0.

Line 23

This is Line 22, $25,500, plus Line 21, $0.  It seems a bit redundant.

Line 24

Subtract Line 23 ($25,500 - the recognized currently taxable gain) from Line 19 ($219,500 -the actual “realized” gain) = $194,000.  This is your deferred gain.  As this is a gain that you are not currently taxed on, this is the amount that will be subtracted from the purchase price of your newly acquired property to determine the “basis” of it.

Line 25

Subtract Line 24 ($194,000 the deferred gain) from Line 16 ($450,000 the FMV or “purchase price” of your new property = $256,000) to arrive at the “basis” of your new property. 
The instructions say Subtract Line 15 ($25,500 cash received and the FMV of other property received, plus net liabilities assumed by other party minus your other expenses related to this transaction) from the sum of Lines 18 ($256,000 adjusted basis of like-kind property you gave up, net amount paid to other party plus any exchange expense not used on Line 15) and Line 23 ($25,500 recognized gain) = $256,000.

Most likely you will combine Line 14 ($2,600) + Line 22 ($25,500) = $28,100 to arrive at the currently taxable gain.

Is your head spinning yet? 

The bottom line is that any current benefits you receive ($10,000 cash, the $7,000 vehicle, and the $20,000 assumed debt) $37,000 less any current benefits you give up (the office furniture with a tax basis of $2,400 and the $6,500 cash used to pay fees and expenses related to the transfer) $8,900 are currently taxable $37,000 – 8,900 = $28,100.  The remaining deferred gains are subtracted from the purchase price of the new property for future consideration. 

Susan Goldcamp has been preparing taxes professionally since 1992.  She is an IRS Enrolled Agent, a Certified Payroll Professional, and a QuickBooks Certified ProAdvisor. She owns and operates Goldcamp Tax Facts in Reading, PA. Susan serves on the boards of the King’s Academy Christian School in Mohrsville, PA and Community Toastmasters in Reading, PA.  She’s also on the finance committee of Berks County Habitat for Humanity.