1031 Form: The 8824, Exchange Agreement, and Every Document You File for a Like-Kind Exchange
The 1031 form most investors are looking for is IRS Form 8824, Like-Kind Exchanges, the single federal tax form you attach to your return to report a Section 1031 deferral on the sale of investment or business-use real property. The 1031 form, however, is not the only piece of paper that has to exist for the deferral to actually hold up under audit. A complete like-kind exchange file typically contains the Form 8824 (filed with Form 1040, 1041, 1065, 1120, or 1120-S depending on entity type), an Exchange Agreement signed before closing of the relinquished property, an Assignment of the purchase and sale contract to the Qualified Intermediary (QI), a 45-Day Identification Notice listing your replacement candidates, a Notice of Assignment delivered to the buyer, a Qualified Escrow or Qualified Trust Agreement governing the proceeds, and the closing settlement statements for both legs of the trade. Each of these is required by the regulations and each one is the document the IRS examiner reads first if your return is selected for audit.
This guide walks through every document, the deadlines that trigger it under IRC Section 1031 and Treasury Regulation 1.1031(k)-1, the boot rules that determine how much gain you can actually defer, the safe harbor requirements for QIs in Treas Reg 1.1031(k)-1(g)(4), the state conformity quirks in California, New York, Washington, Florida, and Texas, and a full $1.0M-to-$1.5M worked example with the line-by-line math you would actually enter on Form 8824 Parts I and III. Every numeric claim and procedural rule is sourced to the Internal Revenue Code, a Treasury Regulation, an IRS publication, a Tax Court opinion, or a top-tier real estate tax practice memo. You will also find the five mistakes that drive the bulk of failed exchanges according to Federation of Exchange Accommodators audit data and recent Tax Court rulings, including the related-party traps in IRC 1031(f) that caught taxpayers in Teruya Brothers and Ocmulgee Fields.
1031 Form Quick-Reference Matrix
The chart below is the TL;DR. Use it to figure out which document you need, when it has to exist, who signs it, and which Code or Regulation section governs. Every row is expanded in a dedicated section below.
| Document | Required by | Deadline | Signed by | Authority |
|---|---|---|---|---|
| IRS Form 8824 (Like-Kind Exchanges) | Federal income tax return for year of exchange | Original due date plus extensions of return | Taxpayer | IRS Form 8824 instructions |
| Exchange Agreement | QI safe harbor under Treas Reg 1.1031(k)-1(g)(4) | Before closing of relinquished property | Taxpayer + QI | Treas Reg 1.1031(k)-1(g)(4)(iii)(B) |
| Assignment of Sale Contract | QI safe harbor | Before closing of relinquished property | Taxpayer, QI, buyer (notice) | Treas Reg 1.1031(k)-1(g)(4)(iv) |
| 45-Day Identification Notice | IRC 1031(a)(3)(A) | 45 calendar days after relinquished closing | Taxpayer (written, signed) | Treas Reg 1.1031(k)-1(b)(2) |
| 180-Day Acquisition | IRC 1031(a)(3)(B) | 180 days after relinquished closing or due date of return, whichever is earlier | QI funds purchase | Treas Reg 1.1031(k)-1(b)(2)(ii) |
| Qualified Escrow/Trust Agreement | QI safe harbor for held funds | Before proceeds received | QI + escrow/trust agent | Treas Reg 1.1031(k)-1(g)(3) |
| Closing Statements (both legs) | Audit trail for boot calculation | At each closing | Title/closing agent | IRS Pub 544 |
| Form 8824 Line 15 worksheet | Boot calculation | With return | Taxpayer/CPA | Form 8824 instructions, p. 4 |
IRC Section 1031: A 104-Year Foundation
The 1031 form sits on top of a statute older than the federal estate tax. Like-kind exchange deferral first appeared in Section 202(c) of the Revenue Act of 1921, was renumbered to Section 112(b)(1) in the 1939 Code, and became Section 1031 of the Internal Revenue Code in 1954. The Tax Cuts and Jobs Act of 2017 narrowed the scope: effective for exchanges completed after December 31, 2017, IRC Section 1031(a)(1) applies only to real property held for productive use in a trade or business or for investment. Personal property exchanges (machinery, vehicles, art, crypto) lost 1031 deferral. The Joint Committee on Taxation estimate scored the narrowing as raising $30 billion over 2018-2027. Every 1031 you file in 2026 is, by definition, a real property exchange.
The current statute has three operative paragraphs you need cold. IRC 1031(a) is the general rule: no gain or loss is recognized on the exchange of real property held for productive use or investment for real property of like kind. IRC 1031(b) handles boot: gain is recognized to the extent of money or non-like-kind property received. IRC 1031(c) handles loss: no loss is recognized even when boot is received. The 45-day and 180-day deadlines live in IRC 1031(a)(3), added by the Deficit Reduction Act of 1984 after the Ninth Circuit’s Starker v. United States, 602 F.2d 1341 (9th Cir. 1979) permitted non-simultaneous exchanges. Treasury filled in the operational rules with the 1991 final regulations under Treas Reg 1.1031(k)-1, the practitioner’s working manual.
Eligibility Rules: Who Can File a 1031 Form and What Property Qualifies
The 1031 form is available to any taxpayer that holds real property for productive use in a trade or business or for investment, then exchanges that property for replacement real property of like kind held for the same purpose. The taxpayer can be an individual, a C corporation, an S corporation, a partnership, an LLC taxed as a partnership, a single-member LLC (disregarded), a trust, or an estate. The one entity that cannot do a 1031 is a foreign corporation or foreign partnership exchanging US real property for foreign real property; IRC 1031(h) treats US and foreign real property as not like-kind.
Qualifying property after TCJA includes raw land, single-tenant net lease buildings, apartment buildings, office, industrial, retail, hotels (real property portion), self-storage, mobile home parks, mineral and royalty interests classified as real property under state law, and 30-year-or-longer leasehold interests under Treas Reg 1.1031(a)-1(c). Personal property included in a real property sale (FF&E in a hotel, equipment in a manufacturing plant) does not qualify and is taxed separately. The IRS issued final regulations on the real property definition in T.D. 9935 (December 2020), defining real property as land and improvements, inherently permanent structures, and structural components, plus certain intangibles like easements and air rights.
Property held primarily for sale (“dealer property” or “inventory”) does not qualify. The classic disqualifying fact pattern is a homebuilder selling spec houses. The IRS examines holding period, taxpayer intent, frequency of transactions, and improvements made to property to determine dealer status. Two years of rental use, documented as Schedule E rental income, is the de facto safe harbor practitioners use. Rev Proc 2008-16 provides a separate vacation home safe harbor: at least 24 months of qualifying use (14 days fair-market rental and limited personal use per year) before and after the exchange.
Primary residences do not qualify for 1031. They qualify for the Section 121 exclusion ($250,000 single, $500,000 married filing jointly), which is a separate regime. A property that was once a primary residence and then converted to a rental can qualify for 1031 after the rental period establishes investment use. The installment sale path under IRC 453 is the other main alternative when 1031 is not available; the two regimes can sometimes be combined when partial cash is received.
The 45-Day Identification Period
The 45-day identification period is the first hard deadline on the 1031 form clock. IRC 1031(a)(3)(A) requires that replacement property be identified in writing on or before the 45th day after the date the relinquished property is transferred. Day one is the day after closing of the relinquished property. The deadline runs in calendar days, not business days, and is not extended for weekends or federal holidays. The IRS extends the 45-day deadline only under Rev Proc 2018-58 for federally declared disasters, and only after the IRS publishes a specific notice covering the affected area.
The identification must be in writing, signed by the taxpayer, and delivered to a party to the exchange other than the taxpayer (Treas Reg 1.1031(k)-1(c)(2)). In practice, the identification is delivered to the QI by hand, fax, certified mail, or a QI portal upload with a system-generated timestamp. An identification delivered only to the taxpayer’s own attorney, CPA, or real estate broker (who is not the QI) does not satisfy the rule, and the Tax Court confirmed this in Christensen v. Commissioner, T.C. Memo 1998-273.
Three identification rules are available. The Three Property Rule (Treas Reg 1.1031(k)-1(c)(4)(i)(A)) permits identification of up to three properties without regard to fair market value. The 200% Rule (Treas Reg 1.1031(k)-1(c)(4)(i)(B)) permits any number of properties so long as aggregate FMV does not exceed 200% of the relinquished FMV. The 95% Rule (Treas Reg 1.1031(k)-1(c)(4)(ii)) is the safety valve: an over-identifying taxpayer survives if it actually acquires at least 95% of the aggregate FMV of identified properties.
| Identification rule | Max properties | FMV limit | When to use |
|---|---|---|---|
| Three Property Rule | 3 | None | Default; most common |
| 200% Rule | Unlimited | 200% of relinquished FMV | Multiple smaller properties |
| 95% Rule | Unlimited | None, but must acquire 95% of identified value | High-confidence acquisitions only |
Identification description matters. Treas Reg 1.1031(k)-1(c)(3) requires an “unambiguous description”, typically a street address, legal description, or assessor’s parcel number (APN). “5-acre parcel north of Main Street” is not unambiguous and has been rejected on audit. The taxpayer may revoke an identification in writing at any time before the 45-day deadline. After the 45th day, identification is locked, and any later acquisition of an unidentified property is taxable boot.
The 180-Day Exchange Period
The 180-day exchange period is the second deadline on the 1031 form clock and runs concurrently with the 45-day period. IRC 1031(a)(3)(B) requires acquisition of replacement property by the earlier of (i) 180 days after the date the relinquished property is transferred, or (ii) the due date of the taxpayer’s federal income tax return for the taxable year in which the relinquished property is transferred, including extensions. Day one is again the day after closing of the relinquished property.
The “earlier of” rule traps unwary taxpayers who close late in the calendar year. If a calendar-year individual closes the relinquished property on November 15, the 180-day deadline lands on May 14 of the following year, but the return due date is April 15. The taxpayer must either acquire by April 15 or file Form 4868 to extend the return to October 15, which preserves the full 180 days. Failure to extend is a hard, no-relief failure. The Tax Court enforced the rule strictly in Knight v. Commissioner, T.C. Memo 1998-107.
The 180-day period is also a calendar-day deadline outside of federally declared disaster relief. IRS disaster relief notices have extended both deadlines for taxpayers in declared disaster areas, including hurricane zones, wildfire counties, and the 2023 California winter storms. The extension is automatic but only applies if the taxpayer’s business location, the relinquished property, the replacement property, the QI, or the closing agent is in the covered area.
Qualified Intermediary Requirements: The 1031(g) Safe Harbor
The QI is the linchpin of every modern delayed exchange and the entity that holds your 1031 form file together. Treas Reg 1.1031(k)-1(g)(4) provides the four safe harbors that prevent the taxpayer from being in “actual or constructive receipt” of the sale proceeds. Constructive receipt would blow the exchange and cause immediate recognition of the entire gain. The QI safe harbor is the one that virtually every modern exchange uses.
A QI is a person who is not the taxpayer or a disqualified person and who, for a fee, enters into a written exchange agreement with the taxpayer, acquires the relinquished property from the taxpayer, transfers the relinquished property to the buyer, acquires the replacement property from the seller, and transfers the replacement property to the taxpayer (Treas Reg 1.1031(k)-1(g)(4)(iii)). The QI does not have to take actual title; the regulation expressly permits assignment of the contract rights to the QI, with notice to the other party.
Disqualified persons under Treas Reg 1.1031(k)-1(k) include the taxpayer’s agent (attorney, CPA, real estate agent, broker who has served the taxpayer within two years of the exchange), a person related to the taxpayer under IRC 267(b) or 707(b), and an entity in which the taxpayer or a related party owns more than 10%. The two-year agent disqualification rule is the one that most often surprises taxpayers: your long-time CPA cannot be your QI. This is why every meaningful exchange uses a third-party QI such as IPX1031, Asset Preservation Inc., Investment Property Exchange Services (IPES), 1031 Corp, First American Exchange, or Accruit, and why the Federation of Exchange Accommodators exists as a self-regulatory body for the industry.
QI bonding is not federally mandated but is required by state QI statutes in California (California DFPI oversight under the 2008 Facilitator Act), Nevada, Colorado, Idaho, Oregon, Virginia, and Washington. State statutes typically require fidelity bonds of $1 million or more, E&O coverage, segregated qualified escrow accounts, and prohibitions on commingling. The 2008 collapse of LandAmerica 1031 Exchange Services, a subsidiary of LandAmerica Financial Group, cost taxpayers approximately $450 million in trapped exchange proceeds and is the cautionary tale every state QI statute is built on.
Like-Kind Property: What Counts as Like-Kind for Real Estate
The “like-kind” requirement is broad for real estate and narrow for everything else (which no longer qualifies post-TCJA anyway). Treas Reg 1.1031(a)-1(b) defines like-kind as referring to “the nature or character of the property and not to its grade or quality.” For real estate, the courts and the IRS have read this broadly: any real property held for productive use or investment is like-kind to any other real property held for productive use or investment, regardless of whether the properties are improved or unimproved.
You can exchange raw land for an apartment building, a single-family rental for a strip center, a vacant lot for a single-tenant net-lease industrial building, an office building in Atlanta for an apartment building in Phoenix, a 30-year ground lease (with renewals) for a fee-simple interest, tenant-in-common (TIC) interests structured under Rev Proc 2002-22 for fee interests, and Delaware Statutory Trust (DST) beneficial interests structured under Rev Rul 2004-86 for direct real estate.
You cannot exchange US real property for foreign real property (IRC 1031(h)), a partnership interest for real estate or for another partnership interest (IRC 1031(a)(2)(D)), a primary residence (Section 121 territory), real property for personal property post-2017, or dealer inventory. Stocks, bonds, partnership interests, certificates of trust or beneficial interests, and choses in action are all expressly excluded by IRC 1031(a)(2).
The DST is the workhorse for fractional 1031 replacement product. According to Mountain Dell Consulting data cited in Bisnow, sponsors raised approximately $9.2 billion in DST equity in 2021, dropped to $4.6 billion in 2023, and recovered toward $6 billion in 2024. Leading DST sponsors include Inland Real Estate Group, ExchangeRight, Capital Square, JLL Income Property Trust, and Passco Companies.
Boot Rules: When You Owe Tax Despite the 1031 Form
Boot is the practical center of every 1031 exam. IRC 1031(b) recognizes gain to the extent of money or non-like-kind property received in the exchange. “Boot” is the practitioner term for any consideration received that is not like-kind replacement property. There are two flavors that matter: cash boot and mortgage boot. Both can convert what looked like a full deferral into a partial tax bill.
Cash boot is the easy case. If you sell a relinquished property for $1,000,000 and acquire a replacement for $800,000, the QI returns $200,000 in cash to you at the end of the exchange (or earlier under the 180-day mark). The $200,000 is fully taxable to the extent of realized gain. Cash boot also includes any sale proceeds the taxpayer touches before the QI takes the funds (constructive receipt), any non-qualified expenses paid from exchange funds (loan fees, prorations of insurance, rent prepayments), and any post-closing reduction in liabilities that is paid out to the taxpayer.
Mortgage boot is the trap. If the relinquished property had a $700,000 mortgage that is paid off at closing, and the replacement property has only a $500,000 mortgage, the $200,000 reduction in liabilities is treated as boot received under Treas Reg 1.1031(d)-2. The taxpayer can offset mortgage boot with new cash brought into the replacement closing. If you write a $200,000 check at the replacement closing, the cash offsets the mortgage relief and there is no boot. You cannot offset cash boot received with new debt; the offset works in only one direction.
| Scenario | Relinquished | Replacement | Boot | Tax |
|---|---|---|---|---|
| Equal trade | $1.0M FMV / $0 debt | $1.0M FMV / $0 debt | $0 | $0 |
| Trade-down | $1.0M FMV / $0 debt | $800K FMV / $0 debt | $200K cash | Up to $200K of gain taxed |
| Mortgage relief | $1.0M FMV / $700K debt | $1.0M FMV / $500K debt | $200K mortgage boot | Up to $200K of gain taxed |
| Mortgage relief offset | $1.0M FMV / $700K debt | $1.0M FMV / $500K debt + $200K cash in | $0 | $0 |
| Cash boot, debt up | $1.0M FMV / $500K debt | $900K FMV / $700K debt | $100K cash boot (no offset) | Up to $100K of gain taxed |
Boot character on the 1031 form follows the gain character. Depreciation recapture under IRC 1245 (personal property) and IRC 1250 (real property) is recognized first up to the amount of boot. Unrecaptured Section 1250 gain on real property is taxed at a maximum 25% federal rate. Remaining gain is long-term capital gain at the standard 0%, 15%, or 20% federal brackets plus 3.8% net investment income tax under IRC 1411 for higher-income taxpayers.
Title-Holding Requirements: Same Taxpayer Rule
The taxpayer who sells the relinquished property must be the same taxpayer who buys the replacement property. This sounds obvious and is the single most common point of failure in family-held real estate exchanges. The IRS examines title at the deed level. If “John and Mary Smith, husband and wife” sell the relinquished property and “John Smith, an individual” or “Smith Family LLC” buys the replacement property, the same-taxpayer rule is broken and the exchange fails.
Disregarded entities under Treas Reg 301.7701-3 are the workhorse exception. A single-member LLC that has not elected corporate treatment is disregarded for federal tax purposes; “John Smith” and “John Smith LLC” are the same taxpayer for 1031 purposes. A revocable living trust is similarly disregarded during the grantor’s life under IRC 671-679. Husband-and-wife joint ownership in a community property state can sometimes be transferred into a community property LLC without breaking the chain (Rev Proc 2002-69 for qualified joint ventures), but state law and the specifics of the operating agreement matter.
Partnerships present the hardest version of the rule. IRC 1031(a)(2)(D) prohibits a partnership interest from being like-kind property. The “drop and swap” releases partners by distributing tenant-in-common interests to them, then each partner does its own 1031 on its TIC fraction. The IRS challenges drop-and-swap when the TIC holding period is short. The Tax Court allowed it in Magneson v. Commissioner, 81 T.C. 767 (1983), aff’d 753 F.2d 1490 (9th Cir. 1985), and the IRS issued partnership-1031 guidance outlining audit risk factors.
The “swap and drop” reverses the order: the partnership does the 1031, then distributes the new property to partners. Most BigLaw real estate tax practitioners, including teams at Skadden, Kirkland & Ellis, Sullivan & Cromwell, Latham & Watkins, and Davis Polk, recommend a one-to-two-year TIC holding period before further dispositions to insulate against IRS recharacterization.
Recent IRS Guidance and Tax Court Cases on the 1031 Form
The 1031 case law is mature, but four lines of recent authority drive most current planning. The first is the related-party trap under IRC 1031(f), where Teruya Brothers Ltd. v. Commissioner, 580 F.3d 1038 (9th Cir. 2009) and Ocmulgee Fields Inc. v. Commissioner, 132 T.C. 105 (2009), aff’d 613 F.3d 1360 (11th Cir. 2010) held that an indirect exchange through a QI of property with a related party (then sold within two years) triggers IRC 1031(f)(4) and disqualifies the exchange. The IRS confirmed this in Rev Rul 2002-83 and audits aggressively when a related-party seller cashes out within two years.
The second line is the deferred-exchange QI safe harbor. North Central Rental & Leasing LLC v. United States, 779 F.3d 738 (8th Cir. 2015) addressed a QEAA reverse exchange under Rev Proc 2000-37. Bartell v. Commissioner, 147 T.C. 140 (2016) recognized a non-safe-harbor reverse exchange in narrow facts but the IRS has declined to follow it broadly.
The third line is the T.D. 9935 real property definition. The 2020 final regulations clarified that “incidental personal property” (FF&E up to 15% of replacement value) does not blow the 1031, though the personal property itself is still taxable boot. Memos from Cooley, Proskauer, and Gibson Dunn walk through the FF&E carve-out for hotel and senior-living exchanges.
The fourth line is post-TCJA scope. The IRS has issued multiple private letter rulings confirming that easements, water rights, mineral rights classified as real property under state law, transferable development rights, and 30-year leasehold interests remain eligible for 1031 treatment. The 2025 Form 8824 instructions reflect all of the above.
State Tax Conformity: California, New York, Washington, Florida, Texas
The federal 1031 form defers federal tax. State conformity varies. Five states deserve close attention because they cover the bulk of US investment real estate activity.
California conforms to IRC 1031 but adds two unique twists. California’s Form FTB 3840 requires annual reporting of any out-of-state replacement property acquired in a 1031 exchange that started in California, until the replacement property is sold in a fully taxable transaction. The state-level “clawback” under FTB guidance (codified at California Rev & Tax Code Section 18032) means California will tax the originally deferred California-source gain when the out-of-state replacement is eventually sold, even decades later. California also requires the QI to register and bond under the California Facilitator Act administered by the California Department of Financial Protection and Innovation.
New York conforms to IRC 1031 for state income tax. The New York Department of Taxation and Finance imposes no separate state-level identification or reporting form, but the New York Real Estate Transfer Tax under Tax Law Article 31 and the New York City Real Property Transfer Tax under NYC Admin Code 11-2102 apply at the deed level regardless of federal 1031 treatment. New York City’s so-called “mansion tax” applies to residential transactions $1 million and above, including investment residential, which can hit 1031 replacements in Manhattan.
Washington has no state income tax but enacted a 7% state capital gains tax effective January 1, 2022 on long-term gains above an annual standard deduction (indexed; $270,000 for 2024). The Washington Supreme Court upheld the tax in Quinn v. State, 526 P.3d 1 (Wash. 2023). The tax expressly conforms to federal 1031, so a properly executed exchange defers Washington capital gains tax. Real estate gains are specifically excluded from the Washington tax base, so for pure real property 1031 the Washington layer mostly does not bite.
Florida has no personal state income tax (Art. VII, Section 5, Florida Constitution). A 1031 form filed with the federal return achieves full deferral of all relevant Florida-level income tax because there is none. Florida does impose documentary stamp tax on deeds under Florida Stat. 201.02 at a rate of $0.70 per $100 of consideration (with Miami-Dade at $0.60), and this applies to both legs of the 1031 trade unaffected by federal deferral. M&A advisors often structure 1031 exit transactions through Florida holding entities for state tax efficiency.
Texas also has no personal state income tax. The Texas franchise (margin) tax under Texas Tax Code Chapter 171 applies to entities with revenue above the no-tax-due threshold ($2.47 million for 2024-25 reports), and 1031-deferred federal income would be included in the franchise tax revenue base. Most individual 1031 exchanges are below the franchise tax threshold and are unaffected. Texas counties impose no documentary stamp tax on deeds.
Worked Example: $1.0M Property to $1.5M Replacement
The worked example below walks through a fully realistic scenario with the line-by-line math you would enter on Form 8824. Assume a single individual taxpayer, Jane, who acquired a single-tenant retail building in 2014 for $600,000, has taken $200,000 of straight-line depreciation through 2025, and sells it on January 31, 2026 for $1,000,000 net of closing costs.
Adjusted basis on the relinquished property is $600,000 minus $200,000 = $400,000. Realized gain on a fully taxable sale would be $1,000,000 minus $400,000 = $600,000. Of the $600,000 realized gain, $200,000 is unrecaptured Section 1250 gain (taxed at up to 25% federal) and $400,000 is long-term capital gain (taxed at 15% or 20% plus 3.8% NIIT). Federal tax on a fully taxable sale, for a taxpayer in the 20% bracket subject to 3.8% NIIT, would be approximately $200,000 at 25% plus $400,000 at 23.8% = $50,000 + $95,200 = $145,200 federal. State tax adds on top.
Jane chooses a 1031 instead. She engages IPX1031 as QI on January 15, 2026, signs the Exchange Agreement and Assignment of the sale contract, and closes the relinquished sale on January 31, 2026. The QI receives $1,000,000 (gross sale price was $1,030,000; closing costs of $30,000 were paid from proceeds, all of which are qualified exchange expenses under Rev Rul 72-456 guidance principles). Day one of the 45-day and 180-day clocks is February 1, 2026.
Jane identifies three properties on March 10, 2026 (day 38), using the Three Property Rule. She acquires Replacement A, an apartment building, on June 15, 2026 (day 135). Purchase price is $1,500,000. Jane brings $500,000 of new capital to the closing, sourced 100% from new bank financing. The QI funds the remaining $1,000,000 from the held proceeds. Closing costs of $20,000 are paid from the new bank loan proceeds.
| Form 8824 line | Description | Amount |
|---|---|---|
| Part III, Line 15 | Cash received, fair market value of other property received, plus net liabilities assumed by other party | $0 |
| Part III, Line 16 | Fair market value of like-kind property received | $1,500,000 |
| Part III, Line 17 | Add lines 15 and 16 | $1,500,000 |
| Part III, Line 18 | Adjusted basis of like-kind property given up, plus net amounts paid to other party | $400,000 + $500,000 = $900,000 |
| Part III, Line 19 | Realized gain (Line 17 minus Line 18) | $600,000 |
| Part III, Line 20 | Smaller of Line 15 or Line 19 (recognized gain) | $0 |
| Part III, Line 21 | Ordinary income under recapture rules | $0 |
| Part III, Line 22 | Line 20 minus Line 21 (capital gain recognized) | $0 |
| Part III, Line 23 | Recognized gain (Line 21 plus Line 22) | $0 |
| Part III, Line 24 | Deferred gain (Line 19 minus Line 23) | $600,000 |
| Part III, Line 25 | Basis of like-kind property received (Line 18 plus Line 23 minus Line 15) | $900,000 |
Jane’s recognized gain is zero, federal tax owed on the exchange is zero, and her basis in Replacement A is $900,000 (the $400,000 carryover basis plus the $500,000 of new equity invested). Depreciation on Replacement A starts immediately on the $500,000 step-up portion using a fresh 27.5-year residential schedule (since this is an apartment building), and the $400,000 carryover basis continues on the relinquished property’s remaining straight-line depreciation schedule under IRC 168(i)(7).
Reverse Exchanges: When You Buy First
The reverse exchange flips the order: you acquire the replacement before you sell the relinquished. The IRS sanctioned a safe harbor for reverse exchanges in Rev Proc 2000-37 using a “qualified exchange accommodation arrangement” (QEAA). An Exchange Accommodation Titleholder (EAT), typically a single-purpose LLC formed by your QI, takes title to the replacement property and holds it until the relinquished property closes. The maximum parking period is 180 days from the date the EAT takes title.
The QEAA documents on the 1031 form file include the QEAA agreement between the taxpayer and the EAT, a master lease of the parked property from the EAT to the taxpayer, an assignment of the purchase contract from the taxpayer to the EAT, and a forward exchange agreement with the QI for the eventual sale. Legal fees are higher (typically $5,000 to $15,000 for the EAT plus QI fees), and bank financing has to be structured to allow the EAT to be the borrower of record during the parking period. Improvement (build-to-suit) exchanges are a reverse variant: the EAT holds title to land while the taxpayer’s contractor builds, and any value added after the 180-day window becomes cash boot.
Five Common 1031 Mistakes That Blow the Exchange
The Federation of Exchange Accommodators publishes industry data on exchange failures and the IRS LB&I examination materials reveal the most common audit findings. Five errors account for the majority of failed exchanges.
Mistake 1: Missed deadlines. Identification on day 46, acquisition on day 181, or filing extension forgotten on a November-to-following-April crossover. The deadlines are absolute. There is no equitable tolling, no excusable neglect, no extension for sickness or natural disaster outside of explicit IRS disaster notices. Knight v. Commissioner, T.C. Memo 1998-107 and Christensen v. Commissioner, T.C. Memo 1998-273 confirm. Set calendar reminders for day 30 and day 150.
Mistake 2: Related-party violations. Indirect exchanges with related parties (parent, sibling, controlled entity) trigger IRC 1031(f)(4) if the related party sells within two years. Teruya Brothers and Ocmulgee Fields applied the rule strictly. The two-year clock runs from the date of the original exchange, not from the date the related party originally acquired its property.
Mistake 3: Taxpayer-mismatch. The deed on the relinquished side does not match the deed on the replacement side. Common failures include revocable trust on relinquished and individual on replacement; husband-and-wife joint tenancy on relinquished and single-member LLC owned only by the husband on replacement; partnership on relinquished and partners individually on replacement without a proper drop-and-swap.
Mistake 4: Partial-exchange math errors. The taxpayer trades down in value, takes cash boot, or takes mortgage relief and does not offset it with new debt or new cash. The Form 8824 calculation is straightforward but unforgiving. Form 6252 installment sale reporting cannot be combined with 1031 deferral on the same gain; the regimes are mutually exclusive on the portion of gain that is deferred under 1031.
Mistake 5: QI bonding gaps. The taxpayer uses an unbonded or under-bonded QI, or one that commingles client funds. The LandAmerica 1031 collapse in 2008 cost taxpayers approximately $450 million. State QI statutes in California, Nevada, Colorado, Idaho, Oregon, Virginia, and Washington exist precisely because of LandAmerica. Always require evidence of a fidelity bond at least equal to your held proceeds, segregated qualified escrow accounts in writing, and an audited financial statement of the QI parent.
Adjacent Tax Code Sections That Interact with the 1031 Form
The 1031 form does not exist in isolation. Three adjacent regimes interact directly with 1031 planning and the documents you keep in the exchange file.
IRC 453 installment sales. When the taxpayer takes back seller financing on the relinquished property, the installment sale rules under IRC 453 can apply to the boot portion of the gain. Treas Reg 1.1031(k)-1(j)(2) allows the taxpayer to treat seller-carry-back notes as boot that is deferred under the installment method, effectively combining 1031 and 453. The mechanics are subtle and the IRC 453 documentation requirements run on top of the 1031 paperwork.
IRC 121 primary residence exclusion. A mixed-use property (duplex where one unit is owner-occupied and the other rented) can blend Section 121 on the residence portion with Section 1031 on the rental portion. Rev Proc 2005-14 walks through the combined treatment and the proportionate basis allocation. The 24-month qualifying use safe harbor in Rev Proc 2008-16 controls the rental side.
IRC 1400Z-2 Opportunity Zones. Qualified Opportunity Funds under IRC 1400Z-2 are a competing deferral regime. A taxpayer cannot both 1031 and QOZ the same gain. The choice typically favors 1031 if the taxpayer wants to roll into direct ownership and continue the chain indefinitely (with a stepped-up basis at death under IRC 1014), and favors QOZ if the taxpayer wants a partial step-up after 10 years and is willing to invest in a fund structure within a qualifying opportunity zone.
Other adjacent considerations: a 1031 should be evaluated alongside any planned asset deal versus stock deal question for the underlying entity, especially when the real property sits inside an operating business; and any pending material adverse effect condition in the purchase agreement can disrupt the 180-day timing if the deal is delayed.
TLDR: Seven Takeaways for the 1031 Form
- Form 8824 is the federal filing, but the exchange file also requires an Exchange Agreement, Assignment, 45-Day Identification, Notice of Assignment, Qualified Escrow/Trust Agreement, and closing statements for both legs. Missing documents are audit findings even when the math is right.
- The 45-day and 180-day deadlines are absolute calendar-day clocks with no equitable tolling outside of federally declared disasters. Calendar them at day 30 and day 150. File Form 4868 if your relinquished closing is October or later.
- Use a bonded, audited, state-registered QI. Major options include IPX1031, Asset Preservation, Investment Property Exchange Services, 1031 Corp, First American Exchange, and Accruit. Verify the fidelity bond covers your full held balance and that funds sit in a segregated qualified escrow.
- Cash boot and mortgage boot are both taxable. You can offset mortgage boot with new cash, but not vice versa. Trade up in value and debt or bring fresh cash to avoid a partial recognition.
- The same taxpayer rule is unforgiving. Disregarded entities and revocable trusts are safe. Partnerships require careful drop-and-swap or swap-and-drop structuring with sufficient holding period before further dispositions.
- State conformity varies. California requires Form FTB 3840 and recaptures California-source gain on out-of-state replacements. Washington’s 7% capital gains tax conforms to 1031. Florida and Texas have no state income tax. New York conforms but imposes deed-level transfer taxes.
- Combine with adjacent regimes carefully. Installment sales under IRC 453 can layer with 1031 for seller-carry notes. Section 121 blends with 1031 on mixed-use property. Opportunity Zones are an alternative, not a complement.
The 1031 form is not a single document. It is a system of documents tied together by a strict timeline, a safe-harbor structure, and a body of regulations and case law now more than a century old. Done right, it permits indefinite deferral of federal capital gains tax, basis pass-through to heirs under IRC 1014, and continuous compounding of after-tax real estate wealth. Done wrong, it collapses into immediate recognition with depreciation recapture, interest, and penalties on top. Build your file the way the regulations require, document every step, and you keep the deferral. Skip a document, miss a deadline, or use the wrong taxpayer name, and you do not.