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Form 8824 CPA tax accountant explains Section 1031 Like-Kind Exchanges | Form 8824 instructions

Wilmington NC CPA explains IRS Form 8824, Like-Kind Exchanges

Gary Bode, CPA: our virtual office can serve you regardless of your location. We can help evaluate alternate scenarios for Form 8824, monitor your intermediary agent and prepare your tax return. If you don’t have a local Form 8824 CPA, call for a free phone consult; (910) 399-2705.

IRS Form 8824, Like-Kind Exchanges, reports bartering of business or investment assets. Perhaps the best known application is exchange of real estate held for investment. Form 8824 calculates your realized gain or (loss), recognized gain, and basis of like-kind property received. We’re not covering Part IV of Form 8824, which governments use to report conflict of interest transactions.

The IRS tax Form 8824 instructions and Form 4797

The 2014 Form 8824 instructions are four pages that cover a broad array of Form 8824 applications. The IRS states it take two hours to learn about the like-kind exchange tax reporting rules. But we spent a week on it in CPA graduate school, and the CPA exams always have a complex question about it. Note the Form 8824 instructions heavily reference Form 4797, Sales of Business Property. The Form 4797 instructions get complex quick as well. So here’s a tax research tip. Since the IRS instructions are problematic, find a tax database you can use, perhaps from a local University. There’s probably an example of the like-kind exchange you’re contemplating. Then just substitute your numbers. Due diligence and prudence can prevent adverse cash flow and tax consequences.

Why Use Form 8824? Sale versus Exchange

A sale of an asset involves recognizing and paying taxes on any gain. Tax on a gain of $100,000 could be $30,000 with the IRS and State taxes. Like-kind exchanges may defer, or permanently, avoid taxes on that same gain. If your fact pattern doesn’t initially qualify for Form 8824, proactive re-structuring of the transaction might bring it into compliance.

It doesn’t always make sense to exchange assets. Significant associated costs, especially when utilizing an intermediary agent, exist. Sometimes a loss on a sale benefits you more than an exchange. We generally run alternate like-kind exchange scenarios for potential Form 8824 tax consequences.

A Simplistic Like Kind Exchange Calculator

Here’s a link that demonstrates the most basic Form 8824 calculations. Note the disclaimers please.

Disclaimer

Our website advocates tax self-preparation when appropriate, but Section 1031 Like-Kind Exchanges are complex. And Form 8824 adds timelines and fiduciary rules. You can’t reasonably expect our posts to cover everything about your particular fact pattern.

“The next best thing to paying less tax is paying that tax later. Form 8824 delays paying tax on your gain from the exchange.”
Gary Bode, Form 8824 CPA and Section 1031 accountant

The Gain Disappears using Form 8824?

Potentially. The deferred gain becomes part of the exchanged asset’s basis. It kicks back in IF you sell it. So like-kind exchanges work best for assets you don’t intend to sell. It’s definitely not for flippers.

Part I of Form 8824 – Looks are Deceiving

While Part I is informational, it pre-supposes you’ve exchanged qualified and like-kind assets.

  • Qualifying assets are used for production in a business, or held for investment purposes. Examples include land, buildings, machinery, vehicles, etc. Examples of non-qualifying assets include stocks, bonds, inventory and merchandise.
  • Like-kind property means the property exchanged must be similar in nature. But there’s some wriggle room.
  • The term personal property, referenced in the Form 8824 instructions, means business assets. As opposed to real (estate) property assets.

Part I also reports the timing of the exchange. Strict IRS timelines apply to like-kind exchanges on Form 8824.

Part I of Form 8824 looks simple. But if the assets you exchanged don’t qualify, and/or the timing of the exchange doesn’t comply with IRS requirements, your gain becomes immediately taxable.

If the Form 8824 instructions don’t cover your particular circumstances, look for a consult from a like-kind exchange CPA. Most intermediaries are honest, etc., etc., but they have a financial incentive. Your CPA just charges you for time.

Part II of Form 8824

As with all taxation issues, folks look for loopholes. Here the IRS requires disclosure of like-kind exchanges with related parties. See the instructions for Form 8824 for details. Related party exchanges still qualify for deferred gain IF the exchanged assets aren’t sold for at least two years. But you must file more Form 8824s affirming non-sale in those later years. Knowing the like-kind exchange tax reporting  rules between related parties means no nasty surprises later.

Part III – the Actual Calculations

Again, see our post that includes a Form 8824 example.

  • Realized gain or (loss) is the dollar figure of the benefit achieved by the exchange.
  • Recognized gain is what you actually pay taxes on.
    • Not all the realized gain may qualify for delayed recognition.
  • Basis of like-kind property received just means the accounting and IRS approved amount of what the exchanged asset’s cost is.

Other Forms may be Required

If Line 22 of Form 8824 is greater than $0, the IRS requires additional forms, depending on your circumstances:

  • Form 4797, Sales of Business Property.
  • Schedule D of Form 1040.
  • Form 6252, Installment Sale Income.

Other Sources of Form 8824 Information

The Internet sports many fine examples on Form 8824. Using a tax program might help you understand some issues. But CPAs look to:

  • IRS documentation, like Form 8824 instructions, related IRS publications and their audit guides.
  • Accounting standards established by the AICPA.
  • Tax court cases help too. For example, the basis of closely held S Corporation stock in divorces is a hot topic.
  • Third party tax databases that make the complex like-kind exchange rules easier to understand.

Most clients contemplating a like-kind exchange have a Form 8824 CPA. But if you don’t, consider calling us for a free initial phone consult at (910) 399-2705. Our services typically include:

  • Evaluating alternate scenarios.
  • Monitoring intermediary agents.
  • Preparing the tax forms.

The big advantage of engaging a Form 8824 CPA is that we don’t work on commission. For me at least, doing an excellent for evaluating like-kind exchanges is the gateway to an ongoing Client.

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