Investment Basics
Tax Season Issues
By RealEstateColorado,Net,Inc

Tax Season Issues

Exchangers must report their exchange on the tax return for the year in which the exchange begins. The exchange is reported on Form 8824, Like-Kind Exchanges.? This form requests date of the exchange transaction, the date properties were identified and financial information obtained from the closing/settlement statement.


For the sale of depreciable rental or business property the Exchanger will also need Form 4797, Sale of Business Property.? For the sale of non-depreciable investment property, the Exchanger will need Form 1041 Schedule D, Capital Gains and Losses.?

Fred Hanselmann Rocky Mountain Photography © hanselmannphotography.com

Refer to Rev. Rule. 72-456 and Treas. Reg. 1.1031(k)-1(g)(7)(ii) for tax treatment of closing costs in an exchange. Rev. Rule. 72-456 deals specifically with broker commissions but is considered a guideline for treatment of other closing costs. The basic rule is that closing costs reduce realized gain on the relinquished property, reduce boot received and are added to the basis of the replacement property.


Remember, if the Exchanger relinquished property after October 18th, they actually have less than 180 days in which to complete their exchange unless they file for an extension. The actual deadline for completing an exchange (the exchange period) is the earlier of either 180 days from the date on which the Exchanger transfers the relinquished property, or the due date, including extensions filed by the Exchanger, for the Exchanger's tax return for the year of the transfer of the relinquished property.


Be aware that the IRS generally has three years in which to audit a tax return. However, this statute of limitations is extended if a taxpayer fails to report more than 25% of their gross income. Often the tax savings generated by an exchange will be significant enough to activate this extension of the three-year audit period.



RealEstateColorado.Net, Inc. is available to assist Exchangers and their advisors with their exchange strategies. The Exchanger is always advised to discuss the intended exchange with their legal or tax advisor. RealEstateColorado.Net, Inc or it's Brokers cannot provide advice regarding specific tax consequences. Investors considering an IRC 1031 tax deferred exchange should seek the counsel of their accountant and attorney to obtain professional and legal advice.

Jeffery James McClintock Real Estate Advsior Broker

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