Form 8824 is the IRS form on which a taxpayer reports every exchange in which nonrecognition is claimed under IRC 1031, as well as related party exchanges subject to IRC 1031(f). The form identifies the relinquished property and replacement property, establishes the exchange timeline, computes the amount realized, recognized gain, deferred gain, and the adjusted basis the taxpayer takes in the replacement property. Completing it correctly requires working through the computational logic of IRC 1031(b), IRC 1031(d), and Treas. Reg. 1.1031(b)-1 and 1.1031(d)-1 in the right order. A single transposition or omitted item changes the basis carried forward into all future depreciation deductions and the gain recognized on ultimate sale.
This guide is written for enrolled agents, CPAs, and tax attorneys who complete or review Form 8824. It covers when the form must be filed, a line-by-line walkthrough of Part I (exchange information), Part II (related party rules), and Part III (the computational core), a worked numerical example with annotated entries, the types and character of boot, the depreciation recapture interplay with Form 4797, multi-asset exchange mechanics, and the preparer errors that most frequently lead to examination adjustments. The companion guide at IRC 1031 Like-Kind Exchange and Qualified Intermediary Practitioner Guide covers the substantive nonrecognition framework, qualified intermediary rules, and timing deadlines; practitioners should read that guide first if the threshold question is whether a given exchange qualifies under IRC 1031.
All statutory and regulatory citations in this guide must be independently verified at IRS.gov and the Electronic Code of Federal Regulations before relying on them in a specific engagement. The form instructions themselves, available at IRS.gov for the applicable tax year, govern computation in case of any discrepancy. This guide is informational and does not constitute legal or tax advice for any specific transaction.
- Every IRC 1031 exchange requires Form 8824, including exchanges in which boot is received and gain is recognized in part, exchanges where a loss is realized but not recognized, and related party exchanges under IRC 1031(f). The form is not optional even when gain is fully deferred.
- Part III is the computational core. It computes amount realized (Line 15), realized gain or loss (Line 17), recognized gain (Line 20), deferred gain or loss (Line 21), and the adjusted basis of the replacement property (Line 22). All lines must be completed; missing entries distort every number downstream.
- Boot triggers recognition only to the extent of realized gain. The recognized gain is the lesser of (a) boot received or (b) realized gain (IRC 1031(b)). A taxpayer cannot recognize more gain than the gain realized, even if boot exceeds the realized gain.
- Net mortgage relief is boot. If the mortgage on the relinquished property exceeds the mortgage assumed on the replacement property, the difference is treated as boot received per Treas. Reg. 1.1031(b)-1(c). Practitioners must net mortgage positions on both sides before computing recognized gain.
- Exchange expenses reduce boot. Qualified exchange expenses (broker commissions, title fees, QI fees, and similar closing costs allocable to the exchange) reduce the amount realized and therefore reduce the boot subject to recognition. Verify the specific treatment against current Form 8824 instructions at IRS.gov.
- Depreciation recapture carries over. A like-kind exchange does not eliminate IRC 1245 recapture taint or unrecaptured IRC 1250 gain; both carry over to the replacement property's basis and are recognized on ultimate taxable disposition. If gain is recognized from boot, recapture is recognized first as ordinary income.
- Related party exchanges require Part II and impose a 2-year holding period under IRC 1031(f). Failure to identify a related party situation is an examination risk; the practitioner must monitor both properties for two years after the exchange closes.
- Form 8824 is filed with the return for the tax year of the exchange. For deferred exchanges where replacement property has not yet been received at year-end, specific Part III rules apply. Verify current instructions at IRS.gov.
Section 1: When Form 8824 Must Be Filed
The IRC 1031 nonrecognition rule
Under IRC 1031(a)(1), no gain or loss is recognized on the exchange of real property held for productive use in a trade or business or for investment if that property is exchanged solely for real property of like kind that is also held for productive use or investment. This is the general nonrecognition rule. When the exchange also involves boot (non-like-kind property or money), IRC 1031(b) provides that gain is recognized to the extent of the boot received, subject to the ceiling of the realized gain. IRC 1031(c) provides that realized losses are not recognized in a like-kind exchange. The reporting mechanism for all of these outcomes is Form 8824.
Triggers for filing Form 8824
Form 8824 must be filed whenever any of the following apply in the tax year (verify against current IRS.gov instructions for the applicable tax year):
- The taxpayer transfers real property in an exchange and claims nonrecognition under IRC 1031, whether gain is fully deferred or only partially deferred because boot was received.
- The taxpayer realizes a loss in a like-kind exchange that is not recognized under IRC 1031(c). The loss is reported on the form even though it does not flow to Schedule D or Form 4797.
- The exchange involves a related party under IRC 1031(f), requiring completion of Part II.
- The taxpayer received replacement property in the current tax year under a deferred exchange for which the relinquished property transfer occurred in a prior tax year (Part III applies to the year replacement property is received).
- The exchange is a "failed" like-kind exchange where the boot received is large enough to result in recognition of the entire realized gain, but the taxpayer nonetheless must run the IRC 1031 analysis on Form 8824 to establish the recognized gain, its character, and the basis of any like-kind property received.
Which Part I applies: current-year vs. prior-year deferred exchanges
For a standard deferred exchange completed in a single tax year (relinquished property transferred and replacement property received in the same year), the taxpayer completes all parts of Form 8824 for that year. For a deferred exchange where the relinquished property was transferred in a prior tax year and replacement property is received in the current year, Part III is completed in the year the replacement property is received. Verify the specific treatment of multi-year deferred exchanges against the current Form 8824 instructions at IRS.gov; the instructions distinguish between Part III for the year of the relinquished property transfer (when replacement has not yet been received) and Part III for the year replacement is received.
Filing deadline
Form 8824 is filed with the taxpayer's return for the tax year in which the exchange occurred (or, for multi-year deferred exchanges, as described above). There is no separate filing deadline for Form 8824 independent of the return due date. If the return is extended, Form 8824 is due with the extended return. Failing to attach Form 8824 to the return does not eliminate the taxpayer's obligation to report the exchange or pay any tax due on recognized gain; it simply omits the disclosure required by IRC 1031 and IRS reporting rules, which can expose the return to examination.
A practitioner who treats a like-kind exchange as simply a taxable sale because the boot received is large relative to the gain should still run the Form 8824 computation. The form identifies whether any like-kind property was received, establishes the basis of that property, and determines the character of the recognized gain (which may include IRC 1245 or 1250 recapture components before flowing to Schedule D). Skipping Form 8824 and reporting the entire gain on Schedule D or Form 4797 without the IRC 1031 analysis can misstate the character of the gain, misstate the basis of the replacement property, and omit required disclosures.
Section 2: Part I -- Information on the Like-Kind Exchange
Part I collects descriptive and timeline information about the exchange. None of these lines produce a dollar computation directly, but they establish the factual record that supports the nonrecognition claim, the related party inquiry, and the timeline compliance required under IRC 1031(a)(3) and Treas. Reg. 1.1031(k)-1.
| Line | What to Enter | Practitioner Notes |
|---|---|---|
| Line 1 | Description of the like-kind property given up (the relinquished property) | Use the street address, legal description, or a property identifier sufficient to unambiguously identify the property. For multi-property exchanges, attach a separate Form 8824 or schedule for each exchanged property. |
| Line 2 | Description of the like-kind property received (the replacement property) | Same standard as Line 1. If replacement property has not yet been received at the time of filing, enter the description of property identified and note the expected receipt date. Verify treatment with current Form 8824 instructions at IRS.gov. |
| Line 3 | Date the relinquished property was transferred (the exchange date) | This is the date the taxpayer closed on the sale of the relinquished property. It is the start date for both the 45-day identification deadline and the 180-day exchange period under IRC 1031(a)(3). For deferred exchanges, the QI closing statement and escrow closing documents control. |
| Line 4 | Date the like-kind replacement property was identified, if a deferred exchange | This date must fall on or before the 45-day identification deadline (Day 45 from Line 3) per IRC 1031(a)(3)(A) and Treas. Reg. 1.1031(k)-1(b). Enter the date the identification letter was delivered to the QI or seller. If this date exceeds Day 45, the exchange fails for the identified property and gain is recognized. |
| Line 5 | Date the like-kind replacement property was received | This date must fall on or before the earlier of (a) Day 180 from Line 3 or (b) the due date of the taxpayer's return (including extensions) per IRC 1031(a)(3)(B) and Treas. Reg. 1.1031(k)-1(b). A date beyond either limit means the exchange fails for that property. Confirm with the replacement property closing statement. |
| Lines 6-7 | Related party exchange disclosure under IRC 1031(f) | Line 6 asks whether the exchange involved a related party, as defined by IRC 267(b) or IRC 707(b)(1). If yes, Part II must be completed. Line 7 asks about prior-year related party exchanges to which IRC 1031(f) still applies. If either party to a prior related party exchange disposed of either property in the current year within the 2-year window, gain is recognized and must be reported. |
Deferred exchange timeline at a glance
The table below summarizes the statutory timeline rules for deferred exchanges. Both deadlines run from the date of transfer of the relinquished property (Line 3). Hedge all specifics to IRC 1031(a)(3) and Treas. Reg. 1.1031(k)-1.
| Deadline | Day Count | Statutory Authority | Consequence of Miss |
|---|---|---|---|
| Identification deadline | Day 45 from transfer of relinquished property | IRC 1031(a)(3)(A); Treas. Reg. 1.1031(k)-1(b)(1) | Exchange fails; realized gain is fully recognized in the year of transfer |
| Exchange period deadline | Earlier of Day 180 or the return due date (including extensions) | IRC 1031(a)(3)(B); Treas. Reg. 1.1031(k)-1(b)(2) | Exchange fails for any property not received by the deadline; gain recognized for that property |
| Return extension (Form 4868) | Extends return due date to October 15 for calendar-year individuals | IRC 6081; Form 4868 | Preserves full 180-day window for late-year exchanges where unextended April 15 due date would otherwise shorten the exchange period |
Section 3: Part II -- Related Party Exchanges (IRC 1031(f))
Part II of Form 8824 addresses exchanges involving related parties as defined in IRC 267(b) or IRC 707(b)(1). IRC 1031(f) disallows the nonrecognition benefit when the relinquished property is exchanged directly or indirectly with a related party if either the original exchanger or the related party disposes of the exchanged property within 2 years of the exchange. The purpose of the provision is to prevent related parties from using a like-kind exchange to shift high-appreciation property to a low-basis holder without triggering gain. All mechanics described in this section should be verified against IRC 1031(f) and Treas. Reg. 1.1031(f)-1.
Who is a "related party" for IRC 1031(f) purposes
For purposes of IRC 1031(f), a related party includes persons described in IRC 267(b) and IRC 707(b)(1). The IRC 267(b) relationships include, among others: members of the taxpayer's family (siblings, spouses, ancestors, and lineal descendants per IRC 267(c)(4)), a corporation in which the taxpayer directly or indirectly owns more than 50% in value of the outstanding stock, and two corporations that are members of the same controlled group. The IRC 707(b)(1) relationships include a partner and a partnership in which the partner directly or indirectly owns more than 50% of the capital or profits interest. Hedge the complete definition and all attribution rules to IRC 267(b), IRC 267(c), and IRC 707(b)(1) as written, and verify at IRS.gov that the applicable definitions have not changed for the filing year.
The 2-year holding period requirement
Under IRC 1031(f)(1), if a taxpayer exchanges property with a related party (or the exchange is structured to achieve an economically equivalent result), and either the taxpayer or the related party disposes of the property received in the exchange within 2 years of the date of the last transfer that was part of the exchange, the deferred gain is recognized in the year of the disqualifying disposition. The 2-year period runs from the date of the exchange, not the date of original acquisition. Practitioners must calendar the 2-year anniversary and advise clients that no disposition of either property by either party should occur within the window without a careful IRC 1031(f) analysis.
A related party exchange that is nonrecognition at closing does not stay nonrecognition automatically for 2 years. If the related party sells either property within the 2-year window, the deferred gain becomes taxable in the year of that disposition, not in the year of the original exchange. The practitioner who handled the original exchange has an engagement responsibility to flag this to the client and monitor the deadline. Failure to track and report a disqualifying disposition is a significant examination risk under IRC 1031(f) and Treas. Reg. 1.1031(f)-1.
Exceptions to the 2-year disqualification rule
Per IRC 1031(f)(2), the 2-year disqualification does not apply to a disposition that occurs by reason of:
- The death of the taxpayer or the related party (IRC 1031(f)(2)(A)).
- A compulsory or involuntary conversion under IRC 1033, if the exchange was not arranged in anticipation of the conversion (IRC 1031(f)(2)(B)).
- A disposition with respect to which the taxpayer can establish to the satisfaction of the Secretary that neither the exchange nor the disposition was designed to avoid federal income tax (IRC 1031(f)(2)(C)). The burden of proof for this exception rests with the taxpayer, and the exception is narrowly applied. Hedge all exception claims to IRC 1031(f)(2) and Treas. Reg. 1.1031(f)-1 and review with tax counsel before relying on it.
Indirect related party exchanges
IRC 1031(f)(4) extends the related party rules to transactions that are structured to achieve, through the use of a qualified intermediary or other device, what is in substance an exchange between related parties. A taxpayer who routes what is economically a related party exchange through a QI does not escape IRC 1031(f). The IRS examines the economic substance of the transaction; the form of the intermediary structure is not determinative. Practitioners evaluating any transaction where a related party is on either side of the exchange (even indirectly) should analyze IRC 1031(f)(4) before concluding the related party rules do not apply.
Section 4: Part III -- Realized Gain, Recognized Gain, and Basis of Like-Kind Property Received
Part III is the computational engine of Form 8824. It runs from the amount realized (Line 15) through deferred gain (Line 21) to the basis of the replacement property (Line 22). Each line feeds the next; an error on any line propagates through every line that follows. The line numbers correspond to the current Form 8824 structure (verify against the IRS.gov form instructions for the applicable tax year, as line numbers can shift with form revisions).
| Line | What Is Computed | Computation Rule and Practitioner Notes |
|---|---|---|
| Line 12 | Fair market value (FMV) of like-kind property received | Enter the FMV of the replacement property as of the date of receipt. This is the gross value of the like-kind consideration received. Obtain FMV support from the closing settlement statement and, for unusual properties, an appraisal. Hedge FMV methodology to the applicable standards; IRS examination may challenge FMV positions. |
| Line 13 | FMV of other (non-like-kind) property and money received | Enter all cash and non-like-kind property received, before netting exchange expenses. This is the gross boot received. Cash returned from the QI at closing, personal property received, and any other non-real-property consideration enter here. Do not net exchange expenses on this line; the netting occurs through a separate adjustment to the amount realized. Verify with the QI closing statement. |
| Line 14 | Net mortgage relief (boot from net debt relief) | Enter the excess of the mortgage (and other liabilities) transferred with the relinquished property over the mortgage (and other liabilities) assumed on the replacement property. If debt assumed exceeds debt relieved, enter zero (additional debt taken on reduces boot but cannot create negative boot on this line). Mortgage boot and cash boot net against each other in the overall amount realized computation. Hedge to Treas. Reg. 1.1031(b)-1(c) and current Form 8824 instructions at IRS.gov. |
| Line 15 | Total amount realized (sum of Lines 12, 13, and 14) | The amount realized is the sum of (a) the FMV of like-kind property received, (b) cash and non-like-kind property received, and (c) net mortgage relief. Exchange expenses (broker fees, QI fees, title fees, and similar qualified costs) reduce the amount realized and therefore reduce recognized gain; they enter the computation through a reduction to Line 15 or an addition to Line 16 per the current Form 8824 instructions. Verify the specific exchange-expense treatment against Form 8824 instructions at IRS.gov for the applicable tax year, as the mechanics affect boot computation and basis. |
| Line 16 | Adjusted basis of the relinquished property (plus allocable exchange expenses) | Enter the adjusted basis of the relinquished property as of the date of transfer, including additions to basis and reduced by all depreciation allowed or allowable before the transfer date. Do not use original cost; use the tax basis after all cumulative depreciation deductions. Add exchange expenses allocable to the relinquished property per the Form 8824 instructions. A common preparer error is using original cost instead of depreciated basis, which understates realized gain. |
| Line 17 | Realized gain or (loss) | Line 15 minus Line 16. If the result is positive, the taxpayer has a realized gain; the gain is deferred to the extent of the like-kind property received and recognized to the extent of boot. If the result is negative, the taxpayer has a realized loss; the loss is not recognized per IRC 1031(c). A realized loss is entered as a negative number but does not flow to Schedule D or Form 4797; it is absorbed into the replacement property's basis computation. |
| Line 18 | Recognized gain from boot: the lesser of Line 13 (boot received) or Line 17 (realized gain) | This is the core IRC 1031(b) computation. Recognized gain is capped at the lesser of (a) the boot received (Line 13, which also reflects net mortgage relief) and (b) the realized gain (Line 17). A taxpayer cannot recognize more gain than the gain realized, even if the boot is larger. If the realized gain (Line 17) is zero or negative, recognized gain is zero regardless of boot received. Verify the exact inputs from Form 8824 instructions at IRS.gov; the line that represents total boot may combine Lines 13 and 14 in the current version of the form. |
| Line 19 | Additional recognized gain under IRC 1031(f) (related party exchanges only) | Complete only if Part II was completed for a related party exchange where a disqualifying disposition has occurred within the 2-year window, resulting in additional gain recognition under IRC 1031(f). Leave blank for non-related-party exchanges. Hedge the computation of any IRC 1031(f) gain to IRC 1031(f)(1) and Treas. Reg. 1.1031(f)-1. |
| Line 20 | Total recognized gain (sum of Lines 18 and 19) | This is the total gain recognized in the exchange. It flows to the appropriate income schedule based on character: IRC 1245 recapture flows to Form 4797 as ordinary income first; remaining gain may be unrecaptured Section 1250 gain (25% rate under IRC 1(h)(1)(D)) or capital gain flowing to Schedule D. The Form 8824 instructions for the applicable tax year direct the practitioner on which schedule receives which portion. Depreciation recapture analysis (Section 6 of this guide) must be completed before Line 20 gain is allocated across schedules. |
| Line 21 | Deferred gain or loss (Line 17 minus Line 20) | This is the gain (or loss) that is deferred into the replacement property. It is the difference between what was realized and what was recognized. This number is embedded in the replacement property's adjusted basis (Line 22) and determines the tax that will be recognized when the replacement property is ultimately sold in a taxable transaction. A large deferred gain on Line 21 signals a large embedded tax liability in the replacement property. |
| Line 22 | Adjusted basis of the like-kind property received (the replacement property) | The replacement property's basis is the FMV at Line 12 minus the deferred gain at Line 21. Equivalently, using the "exchange basis" formula: adjusted basis of relinquished property, plus gain recognized, minus boot received net of exchange expenses (each adjustment has a specific sign convention; both formulations yield the same result when correctly applied). Hedge the basis computation to Treas. Reg. 1.1031(d)-1. The basis computed here is the starting point for all future depreciation deductions on the replacement property. |
Line 22 basis can be derived two ways, and both should yield the same result: (1) FMV of replacement property (Line 12) minus deferred gain (Line 21); and (2) adjusted basis of relinquished property (Line 16) plus recognized gain (Line 20) minus net boot received. If the two methods give different results, there is an input error somewhere in Part III. Running both computations as a check before finalizing the form is a recommended practice. Hedge both formulations to Treas. Reg. 1.1031(d)-1 and the current Form 8824 instructions at IRS.gov.
Worked Numerical Example: Part III Line-by-Line
The following hypothetical illustrates Part III mechanics. All figures are for illustration purposes only. Verify the specific treatment of exchange expenses and mortgage boot against the current Form 8824 instructions at IRS.gov and against Treas. Reg. 1.1031(b)-1 and 1.1031(d)-1 before applying to any client engagement.
The example above treats qualified exchange expenses as reducing the amount realized (and therefore reducing the boot subject to recognition), which is the general approach supported by Treas. Reg. 1.1031(b)-1(c) and applicable IRS.gov guidance. However, the specific mechanical treatment of exchange expenses on Form 8824 (which line they enter, how they interact with cash and mortgage boot) can shift between form versions. Before finalizing any Form 8824 that involves exchange expenses, verify the treatment against the current Form 8824 instructions at IRS.gov for the applicable tax year. Applying an outdated treatment can misstate both recognized gain and the basis of the replacement property.
Section 5: Boot -- Types, Netting, and Character of Recognized Gain
"Boot" is any consideration received in the exchange that is not like-kind real property. Boot is the mechanism by which a tax-deferred exchange becomes partially taxable. Understanding what qualifies as boot, how boot from different sources nets against each other, and how the character of the recognized gain is determined is essential to completing Part III correctly and to characterizing the gain on the appropriate schedules.
Cash boot
Cash boot is any money received in the exchange that is not reinvested in like-kind replacement property. In a deferred exchange, this typically takes the form of exchange proceeds returned from the QI at closing on the replacement property, because the replacement property costs less than the net exchange proceeds. Cash paid by the taxpayer to equalize the exchange (for example, paying additional cash out of pocket to acquire a more expensive replacement property) offsets cash boot received; it does not create negative boot. The practitioner should reconcile the QI closing statement to confirm the amount of cash remaining after the replacement property purchase; that remainder is cash boot.
Mortgage boot (net debt relief)
Mortgage boot arises when the taxpayer is relieved of more debt on the relinquished property than the taxpayer assumes on the replacement property. The net debt relief (mortgage on relinquished property minus mortgage on replacement property, when positive) is treated as cash boot received per Treas. Reg. 1.1031(b)-1(c). Net debt relief cannot be negative on this line; if the taxpayer assumes more debt on the replacement property than is relieved on the relinquished property, the excess debt assumed offsets cash boot but does not create a boot credit that can further reduce recognized gain. Verify the netting mechanics against Treas. Reg. 1.1031(b)-1(c) and the current Form 8824 instructions at IRS.gov.
Non-like-kind property boot
Any non-real-property received as part of the exchange consideration is boot at its fair market value. Post-TCJA, personal property is no longer eligible for like-kind exchange treatment under IRC 1031(a)(1) (as amended), so personal property (furniture, equipment, or other tangibles included in a real estate transaction) received in the exchange is boot at its FMV. In transactions where personal property is included in the real estate closing, the practitioner must allocate the consideration between real property and non-like-kind property and treat the FMV allocated to personal property as boot. Hedge to IRC 1031(a)(1) as amended by the Tax Cuts and Jobs Act and to any relevant transition guidance for exchanges with timely identification before January 1, 2018.
Boot can offset boot
The regulations permit cash and mortgage boot to net against each other in computing the total boot recognized. A taxpayer who assumes additional debt on the replacement property reduces (offsets) cash boot received dollar-for-dollar. A taxpayer who pays additional cash out of pocket (adds equity) reduces cash boot received dollar-for-dollar. The netting is one-directional at each line; no line on Form 8824 goes below zero. Verify the specific netting order against the current Form 8824 instructions at IRS.gov, which express the computation in terms of the particular lines on the current form.
Character of recognized gain
The recognized gain on Line 20 of Form 8824 does not flow to Schedule D directly in all cases. The character of the recognized gain must be determined before it is allocated to the appropriate schedule. The character analysis follows this order (hedge all steps to applicable regulations and Form 4797 instructions at IRS.gov):
- If the relinquished property was depreciable personal property (before TCJA) or depreciable real property, compute IRC 1245 or IRC 1250 depreciation recapture first. To the extent recognized gain does not exceed IRC 1245 recapture, the recognized gain is ordinary income, reported on Form 4797 Part II or Part III as applicable.
- For real property, to the extent recognized gain exceeds IRC 1245 recapture but represents depreciation previously claimed on real property (the "unrecaptured Section 1250 gain" under IRC 1(h)(1)(D)), that portion is taxed at the 25% rate on Schedule D (or through the collectibles rate structure as applicable). Hedge the rate applicable to unrecaptured Section 1250 gain to IRC 1(h)(1)(D) and current IRS.gov guidance, as capital gain rate structures are subject to legislative change.
- Any remaining recognized gain above the recapture amounts is long-term capital gain (if the holding period requirement is met) and flows to Schedule D. Verify the holding period computation against the date of acquisition of the relinquished property and the current long-term holding period rule under IRC 1222.
Section 6: Depreciation Recapture in Like-Kind Exchanges
Depreciation recapture is one of the most frequently misunderstood aspects of the like-kind exchange. The common misconception is that a fully deferred exchange eliminates the recapture obligation. It does not. Both IRC 1245 recapture (for personal property, which applied pre-TCJA) and unrecaptured Section 1250 gain (for real property) carry over into the replacement property and are recognized on ultimate taxable disposition. The exchange defers the recapture; it does not extinguish it. All mechanics in this section should be hedged to the applicable regulations cited and verified at IRS.gov.
IRC 1245 recapture: the carryover taint
Under Treas. Reg. 1.1245-2(c)(4) and Treas. Reg. 1.1245-4(c), the IRC 1245 recapture potential that existed in the relinquished property carries over to the replacement property received in a like-kind exchange. The replacement property is treated as having the same recapture potential as the relinquished property, even though the basis of the replacement property may be lower. When the replacement property is ultimately sold in a taxable transaction, the accumulated IRC 1245 recapture (from both the relinquished property and any new depreciation on the replacement property) is recognized as ordinary income to the extent of the gain. Hedge this carryover rule to Treas. Reg. 1.1245-4(c) and verify whether any subsequent regulation changes apply to the filing year.
To the extent gain is recognized in the exchange (from boot received), the IRC 1245 recapture is recognized first, before any capital gain. A taxpayer who receives boot and whose relinquished property had IRC 1245 recapture potential must compute whether any portion of the recognized gain is ordinary income before characterizing any portion as capital gain. This computation runs through Form 4797 and the applicable regulations.
Note on TCJA scope: after January 1, 2018, personal property is no longer eligible for IRC 1031 treatment per IRC 1031(a)(1) as amended. The IRC 1245 recapture carryover rules for like-kind exchanges remain relevant to the extent they apply to prior-year exchanges of personal property (those completed before the TCJA effective date) and to certain components of real property transactions (cost segregation assets). Practitioners with pre-TCJA deferred exchanges in the client's history must verify whether carryover taint from those exchanges still exists in the replacement property. Hedge transition mechanics to the relevant TCJA transition guidance at IRS.gov.
IRC 1250 and unrecaptured Section 1250 gain
For real property in a like-kind exchange, the unrecaptured Section 1250 gain (i.e., cumulative depreciation previously deducted on the real property that would not be recaptured as ordinary income under IRC 1250 itself) carries over to the replacement property's basis. Under Treas. Reg. 1.1250-3(d)(1), the like-kind exchange does not eliminate this gain; it defers it. When the replacement property is sold, the unrecaptured Section 1250 gain (which may include amounts from both the relinquished property and new depreciation on the replacement property) is taxed at the rate specified under IRC 1(h)(1)(D) (currently 25%, subject to any future rate changes under legislation; verify the applicable rate at IRS.gov for the filing year). Hedge to Treas. Reg. 1.1250-3(d)(1) and current IRS.gov guidance on applicable capital gain rates.
Form 4797 interplay
Any gain recognized on Line 20 of Form 8824 that is characterized as IRC 1245 recapture ordinary income or as gain from a depreciable business property must be reported on Form 4797 before flowing to Schedule D. The practitioner must complete Form 4797 for any exchange involving depreciable real or business property where gain is recognized, to determine what portion is ordinary income (recapture) and what portion is capital gain. The Form 8824 instructions at IRS.gov for the applicable tax year direct the practitioner on which portions of Line 20 gain go to which lines of Form 4797 and Schedule D. Do not report all recognized gain on Schedule D without first running the Form 4797 recapture analysis; doing so understates ordinary income and overstates capital gain. For the full depreciation recapture framework, see the IRC 1245 and 1250 Depreciation Recapture and Form 4797 Practitioner Guide.
Section 7: Multi-Asset Exchanges and the Residual Method
Many commercial real estate transactions involve multiple properties exchanged simultaneously or as part of a coordinated plan. When more than one relinquished property is exchanged, or more than one replacement property is received, the Form 8824 computation cannot simply be aggregated across all properties. Each exchange must be analyzed separately, and the results aggregated only after computing gain, recognized gain, deferred gain, and basis for each property pair. Hedge all multi-asset exchange mechanics to Treas. Reg. 1.1031(j)-1 and the current Form 8824 instructions at IRS.gov.
Separate Form 8824 for each exchange (or separate worksheets)
The IRS generally requires or recommends a separate Form 8824 (or a separate worksheet attached to a single Form 8824) for each pair of exchanged properties when multiple properties are involved. This is because each relinquished property has its own adjusted basis, its own holding period, its own depreciation recapture profile, and its own FMV. Aggregating all properties onto a single Form 8824 without proper allocation can misstate the basis and deferred gain for each replacement property and can mischaracterize the amount of boot recognized from each exchange.
Residual method under Treas. Reg. 1.1031(j)-1
When multiple like-kind and non-like-kind properties are received in a single exchange (for example, a taxpayer receives two properties, one of which is like-kind real property and one of which is personal property or cash), Treas. Reg. 1.1031(j)-1 governs the allocation of consideration between the like-kind and non-like-kind property. The residual method assigns FMVs to each class of property received, starting with the highest-priority class, and treats any remaining value as the next class. Practitioners handling multi-asset exchanges should use a separate worksheet for each property pairing, assign FMV to each property on a supportable basis, and reconcile the worksheets to the aggregate Form 8824 totals. Retain the worksheets in the tax file as support for the positions taken on the form. Hedge all allocation mechanics to Treas. Reg. 1.1031(j)-1 and verify the current form instructions at IRS.gov.
Basis allocation in multi-asset exchanges
When multiple replacement properties are received, the deferred gain must be allocated among them to establish the basis of each individual replacement property. The general approach under Treas. Reg. 1.1031(d)-1 is to allocate the aggregate basis among the replacement properties in proportion to their respective FMVs. Each property's allocated basis is the starting point for depreciation and for computing gain or loss on future sale. Practitioners should document the FMV support for each replacement property and retain the allocation worksheet in the client file. A basis misallocation on a multi-asset exchange can persist undetected for years and generate a significant examination adjustment when the properties are eventually sold.
Section 8: Common Form 8824 Preparer Errors
The following errors are among the most frequently identified in Form 8824 preparer practice, either in peer review or on examination. Each error creates a misstatement that compounds over the life of the replacement property.
- Failing to file Form 8824 at all. Some preparers treat a like-kind exchange as a fully taxable sale, reporting the entire gain on Schedule D or Form 4797 without completing Form 8824. This omits the required disclosure, potentially overstates the tax due (because the deferred portion is incorrectly treated as recognized), and misstates the basis of the replacement property by using FMV instead of the exchange basis under Treas. Reg. 1.1031(d)-1.
- Using original cost instead of adjusted basis on Line 16. The adjusted basis entered on Line 16 must reflect all depreciation allowed or allowable before the date of the exchange, not the original purchase price. Using original cost understates the realized gain on Line 17 and understates the recognized gain on Line 18, which can result in an underpayment of tax. The error also propagates into the replacement property's basis on Line 22, causing all future depreciation deductions on the replacement property to be understated.
- Computing net mortgage relief incorrectly. Boot from net mortgage relief is computed as (mortgage on relinquished property) minus (mortgage assumed on replacement property), with a floor of zero. Preparers sometimes fail to include all liabilities associated with the relinquished property (including seller-financed debt, lines of credit secured by the property, and assumed obligations), or fail to correctly identify all debt assumed on the replacement property. Incomplete liability identification leads to an incorrect Line 14 and a corresponding misstatement of recognized gain.
- Omitting exchange expenses from the computation. Qualified exchange expenses reduce the amount of boot subject to recognition (and reduce the amount realized). Failing to include exchange expenses (QI fees, broker commissions allocable to the exchange, title and escrow fees, and similar closing costs) results in an overstatement of recognized gain and a corresponding understatement of the deferred gain, producing a replacement property basis that is too high. Verify the specific treatment of exchange expenses against the current Form 8824 instructions at IRS.gov for the applicable tax year.
- Skipping the depreciation recapture analysis. Preparers who compute recognized gain on Line 20 and route all of it to Schedule D as capital gain, without first analyzing the IRC 1245 or 1250 recapture components, mischaracterize the income. Ordinary income recapture must go to Form 4797 and be taxed as ordinary income; it cannot be converted to capital gain by treating the entire exchange as a capital transaction. This error can result in significant additional tax, interest, and penalty on examination.
- Failing to identify a related party exchange and omitting Part II. Preparers who do not systematically screen for related party status (IRC 267(b) and IRC 707(b)(1)) on every exchange may fail to complete Part II and fail to advise the client of the 2-year holding period requirement under IRC 1031(f). A disqualifying disposition by either party within 2 years produces gain recognition in the year of the disposition, not the year of the exchange, and the omission is not discovered until examination.
- Not monitoring the 2-year holding requirement after a related party exchange closes. Even when Part II is correctly completed at the time of the exchange, the practitioner must advise the client of the monitoring obligation and have a system to calendar the 2-year anniversary. A client who sells either property 18 months after the exchange without notifying the preparer may unknowingly trigger gain recognition under IRC 1031(f) that appears on a subsequent year's return (the year of the disqualifying disposition), not the year of the original exchange. The practitioner who lacks a monitoring system will not catch this until it is flagged on examination.
- Allocating basis incorrectly in a multi-asset exchange. For exchanges involving multiple properties, failing to allocate the aggregate deferred gain among individual replacement properties in proportion to their respective FMVs (per Treas. Reg. 1.1031(d)-1) produces incorrect per-property bases. The error typically goes undetected until each property is sold in a subsequent taxable transaction, at which point the per-property gain calculation is incorrect, potentially understating or overstating the gain on each sale.
Frequently Asked Questions
What happens to Form 8824 if the exchange period expires and I cannot receive the replacement property?
If the 180-day exchange period (or the earlier return due date, if applicable) expires before the taxpayer closes on the replacement property, the exchange fails for the unreceived property. The taxpayer must still file Form 8824 for the tax year in which the relinquished property was transferred. Because no like-kind property was received (for the failed portion), Line 12 for that portion is zero, the amount realized is composed entirely of boot (cash proceeds and net mortgage relief), and the recognized gain equals the lesser of total boot or the realized gain. In a fully failed exchange, this typically means the entire realized gain is recognized. The character of that gain is determined by the same IRC 1245/1250 recapture analysis described in Section 6. Verify the treatment of partially failed and fully failed exchanges against the current Form 8824 instructions at IRS.gov for the applicable tax year.
My client exchanged business real estate for residential rental property. Is this a valid like-kind exchange?
Yes, provided both properties are domestic US real property and both are held for productive use in a trade or business or for investment. Under Treas. Reg. 1.1031(a)-1, the like-kind standard for real property refers to the nature or character of the property, not its grade, quality, or specific use. Business real property exchanged for residential rental property satisfies the like-kind standard. The critical condition is the holding purpose: the replacement property must be held for investment or productive business use, not for personal use. Document the investment purpose from the date of acquisition of the replacement property; a pre-arranged sale or conversion to personal use immediately after the exchange could jeopardize the nonrecognition claim.
My client received cash at closing as part of a 1031 exchange. How does this affect Form 8824?
Cash received in the exchange is boot and is reported on Line 13 of Form 8824 (Part III). The recognized gain is the lesser of (a) the boot received (cash plus net mortgage relief, net of exchange expenses per applicable IRS.gov guidance and Treas. Reg. 1.1031(b)-1) and (b) the realized gain on Line 17. If the boot received is less than the realized gain, only the boot is recognized; the remaining gain is deferred on Line 21 and embedded in the replacement property's basis on Line 22. If the realized gain is zero or negative, no gain is recognized even if cash was received. The recognized gain on Line 20 must be characterized for recapture (Form 4797) before it flows to Schedule D. Verify the specific cash-boot treatment against the current Form 8824 instructions at IRS.gov for the applicable tax year.
Does depreciation recapture disappear in a like-kind exchange?
No. Depreciation recapture does not disappear in a like-kind exchange; it is deferred into the replacement property. Under Treas. Reg. 1.1245-2(c)(4) and Treas. Reg. 1.1245-4(c), the IRC 1245 recapture taint (ordinary income recapture potential from depreciation previously deducted) carries over from the relinquished property to the replacement property. When the replacement property is ultimately sold in a taxable transaction, the accumulated recapture (from both properties) is recognized as ordinary income. Similarly, unrecaptured Section 1250 gain (taxed at the 25% rate under IRC 1(h)(1)(D)) carries over under Treas. Reg. 1.1250-3(d)(1). To the extent gain is recognized in the exchange because boot was received, recapture is recognized first as ordinary income before any capital gain. The like-kind exchange defers the tax; it does not extinguish the recapture obligation.
My client exchanged into a Delaware Statutory Trust (DST). Does Form 8824 still apply?
Yes. Delaware Statutory Trust interests have been treated by the IRS as direct ownership interests in real property for IRC 1031 purposes in Private Letter Rulings and Rev. Rul. 2004-86, making DST interests qualifying replacement property in a like-kind exchange (verify current IRS guidance at IRS.gov before relying on this treatment; it rests on non-precedential guidance). Form 8824 is filed for the tax year of the exchange in the normal manner. The FMV of the DST interest received is entered on Line 12 as the FMV of like-kind property received. If the DST interest is acquired for a purchase price lower than the net exchange proceeds, the difference is boot (reported on Line 13). The full Part III computation applies, including the computation of recognized gain, deferred gain, and basis of the DST interest on Line 22. The basis computed on Line 22 becomes the taxpayer's tax basis in the DST interest for all future income, depreciation, and gain computations.
The following statutory and regulatory citations in this guide should be independently verified at IRS.gov and the Electronic Code of Federal Regulations (eCFR) before relying on them in practice: (1) General nonrecognition rule: IRC 1031(a)(1); (2) Partial recognition with boot: IRC 1031(b); (3) Nonrecognition of loss: IRC 1031(c); (4) Basis of replacement property: IRC 1031(d); Treas. Reg. 1.1031(d)-1; (5) Timeline deadlines: IRC 1031(a)(3)(A) and (B); Treas. Reg. 1.1031(k)-1(b); (6) Boot from mortgage relief: Treas. Reg. 1.1031(b)-1(c); (7) Related party rules: IRC 1031(f); IRC 267(b); IRC 707(b)(1); Treas. Reg. 1.1031(f)-1; (8) Multi-asset exchanges and residual method: Treas. Reg. 1.1031(j)-1; (9) IRC 1245 recapture carryover: Treas. Reg. 1.1245-2(c)(4); Treas. Reg. 1.1245-4(c); (10) IRC 1250 recapture carryover: Treas. Reg. 1.1250-3(d)(1); (11) Unrecaptured Section 1250 gain rate: IRC 1(h)(1)(D); (12) TCJA restriction of IRC 1031 to real property: IRC 1031(a)(1) as amended; (13) DST interests: Rev. Rul. 2004-86 and IRS Private Letter Rulings (non-precedential). All figures and rate references in this guide are subject to change by legislation or IRS guidance and must be confirmed against current law for the applicable tax year. This guide is informational and does not constitute tax or legal advice for any specific transaction.