Key Takeaways
- Form 8824 Part III calculates realized gain, recognized gain (boot), and replacement property basis.
- Five common errors: vague descriptions, wrong dates, miscalculated basis, omitted expenses, and unreported boot.
- Provide the QI exchange summary, both closing statements, and depreciation schedule to the CPA 8+ weeks before filing.
- Pre-filing review of the draft Form 8824 prevents errors that would trigger IRS scrutiny via amended returns.
Form 8824 (Like-Kind Exchanges) is the IRS reporting form for all 1031 exchanges. Errors on this form can trigger audit, delay processing, or invalidate the exchange. This lesson covers the form preparation process and the most common errors that CPAs and investors make.
Form 8824 Line-by-Line
Form 8824 has four parts. Part I (Information on the Like-Kind Exchange): Lines 1-7 capture basic exchange information—descriptions of properties, dates of identification and transfer, whether the exchange is with a related party. Part II (Related Party Exchange Information): completed only for related party exchanges—Lines 8-10 address the 2-year holding requirement. Part III (Realized Gain or Loss, Recognized Gain, and Basis of Like-Kind Property Received): the critical calculation section. Line 12: Fair market value of replacement property. Line 13: Adjusted basis of relinquished property. Line 15: Exchange expenses. Line 18: Realized gain (total gain on the transaction). Line 19: Boot received (cash and unlike property). Line 21: Recognized gain (the taxable portion—should be zero for a fully deferred exchange). Line 24: Basis of replacement property (the carryover basis). Part IV (Deferral of Gain From Section 1043 Conflict-of-Interest Sales): rarely applicable to real estate investors.
Common Form 8824 Errors
Error 1: Incorrect property descriptions—vague descriptions trigger IRS correspondence and potential audit. Include the full street address and property type. Error 2: Wrong date entries—the identification date (Day 45 deadline) and transfer date (replacement closing) must match actual dates, not planned dates. Error 3: Miscalculated adjusted basis—failing to subtract all accumulated depreciation (including cost-seg-accelerated depreciation) from the relinquished property basis. This results in an incorrect gain calculation and incorrect replacement property basis. Error 4: Omitting exchange expenses—selling commissions, QI fees, title insurance, and closing costs on both properties reduce the realized gain. Omitting them overstates the gain. Error 5: Failing to report partial boot—if the exchange was not fully deferred (mortgage boot or cash boot), the boot must be reported on Line 19 and the recognized gain on Line 21. Many CPAs report full deferral without calculating boot, potentially understating the taxable gain.
Coordinating With Your CPA for Accurate Filing
Provide your CPA with the following documents at least 8 weeks before the filing deadline: (1) the QI's exchange summary (reconciliation of all funds), (2) closing statements for both properties, (3) the relinquished property's depreciation schedule (showing accumulated depreciation), (4) the identification letter with dates, (5) any boot calculation showing mortgage boot or cash boot, and (6) the cost segregation study on the replacement property (if applicable). Schedule a pre-filing conference to review the Form 8824 draft: verify that the realized gain matches your own calculation, confirm the replacement property basis is correct, and ensure the depreciation schedule for the replacement property reflects the two-layer basis (exchange + excess). An error on Form 8824 is easier to correct before filing than after—an amended Form 8824 (via 1040-X) triggers additional IRS scrutiny.
Compliance Matrix
Sources
- IRS Form 8824 — Like-Kind Exchanges(2024-12-15)
- IRS Form 8824 Instructions(2024-12-15)
- IRC Section 1031 — Exchange of Real Property Held for Productive Use or Investment(2024-12-15)
Common Mistakes to Avoid
Reporting the replacement property basis as its purchase price rather than the carryover basis
Consequence: Overstated basis leads to understated gain on the eventual sale—triggering back taxes, penalties, and interest when discovered
Correction: The replacement property basis is the carryover basis from the relinquished property (adjusted basis + any boot paid), not the purchase price
Filing Form 8824 for the year the replacement property closed rather than the year the relinquished property was sold
Consequence: Form 8824 must be filed for the tax year in which the relinquished property was transferred—filing in the wrong year creates a reporting gap
Correction: Always file Form 8824 with the tax return for the year the relinquished property closing occurred, even if the replacement closing is in a different tax year
Failing to report mortgage boot when the replacement property has lower debt than the relinquished property
Consequence: Unreported boot understates recognized gain, creating a deficiency that will surface when the replacement property is eventually sold
Correction: Calculate boot explicitly: compare relinquished debt to replacement debt, report any mortgage boot on Line 19, and recognize the corresponding gain on Line 21
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Test Your Knowledge
1.What IRS form is used to report a like-kind exchange?
2.What is the most common error on Form 8824?
3.When should Form 8824 be filed?