A 1031 exchange must be reported in the tax year when the original property (relinquished property) was sold—not when the replacement property was acquired.
If you completed a 1031 exchange in 2024, you must report it on your 2024 tax return—even if your replacement property was acquired in 2025. Properly completing IRS Form 8824 for like-kind exchanges is essential to ensuring your tax deferral is recognized by the IRS.
Required information for IRS Form 8824.
When completing Form 8824, you will need:
- The original acquisition date of your relinquished property.
- The date you sold your relinquished property (exchange start date).
- The date you identified your replacement property.
- The date you purchased/closed on your replacement property.
- A detailed description of all properties included in the exchange.
Make sure these dates match your closing statements to ensure accuracy in your reporting.
Reporting interest earned on exchange proceeds.
If your exchange funds were held in an interest-bearing account, you should receive a Form 1099-INT from the financial institution where your funds were deposited. Any interest will need to be reported as ordinary income on your tax return. If your exchange spans two years, you will receive a 1099-INT for each year. Make sure to contact your Exchange Officer for assistance if you haven’t received your 1099-INT(s).
Exchanges with “Boot” received in the following tax year.
If your exchange started near the end of 2024, but was not completed until 2025…
You may have received cash “boot” or proceeds returned to you if not all exchange funds were reinvested into a replacement property. Under Treasury regulations, you may elect to report this boot gain on your 2025 tax return instead of 2024 by using the installment method outlined in Section 453 of the Internal Revenue Code. This method allows you to recognize the gain gradually as you receive payments, instead of all at once.
If your exchange fails entirely in 2025…
If no replacement properties were acquired in 2024, and all exchange proceeds are being returned to you, you can report the gain on your 2025 return provided you had a bona fide intent to complete the exchange when it began. If you choose the installment method, do not report the boot on Line 22 of Form 8824. Instead, file Form 6252 and follow the instructions for reporting a part exchange, part installment sale.
If your relinquished property was subject to debt that was paid off at closing…
Rev. Rul. 2003-56 clarifies that the excess of your relinquished property debt over your replacement property debt is treated as money received in the year of sale for installment reporting. While this ruling focused on partnerships, it applies to individual taxpayers as well. Using the installment method is an optional election, and you should consult your tax advisor to determine whether this option makes sense for your specific situation.
State tax considerations for 1031 exchanges.
As of January 1, 2023, all states with an income tax either mirror the federal tax code or have adopted their own 1031 exchange rules. However, some states have unique requirements:
- Pennsylvania now conforms to federal 1031 rules (previously, it taxed exchange gains).
- California, Massachusetts, Montana, and Oregon have claw-back rules, taxing gains on out-of-state exchanges.
- States with non-resident withholding tax may still require filing a state return, even if you qualify for an exemption.
To ensure compliance with both federal and state regulations, it is always best to consult your tax advisor for guidance on reporting your 1031 exchange correctly. By properly reporting your exchange, you can maintain compliance with IRS regulations and continue deferring capital gains taxes on your investment properties, maximizing the benefits of your transaction.
1031 CORP. offers a comprehensive 1031 Exchange Reporting Guide, which provides step-by-step instructions for completing Form 8824 and understanding key reporting requirements.
Get Your Copy Today.
1031 CORP. cannot provide tax or legal advice, but our knowledgeable Exchange Team is here to educate Exchangers and work with their advisors.
