When it comes to recording a 1031 exchange on your tax return, the process involves several steps and requires careful attention to detail to ensure compliance with IRS regulations. Here’s a comprehensive guide to help you navigate this process, using an example to illustrate the steps.

1. IRS Form 8824: The primary form used to report a 1031 exchange is IRS Form 8824, "Like-Kind Exchanges." This form is essential for detailing the specifics of your exchange transaction. It includes information about the properties involved, the dates of the transactions, and the financial details of the exchange.
2. Part I - Information on the Like-Kind Exchange:
   • Line 1: Enter a description of the relinquished property and the replacement property. For example, if you exchanged a rental property in Florida for a commercial building in Texas, you would describe these properties here.
   • Line 2: Provide the date you transferred the relinquished property.
   • Line 3: Enter the date you identified the replacement property. Remember, you must identify the replacement property within 45 days of transferring the relinquished property.
   • Line 4: Enter the date you received the replacement property. This must be within 180 days of the transfer of the relinquished property or by the due date of your tax return, including extensions, whichever is earlier.
3. Part II - Related Party Exchange Information: If your exchange involved a related party, you must complete this section. This includes providing the name, address, and taxpayer identification number of the related party.
4. Part III - Realized Gain or Loss, Recognized Gain, and Basis of Like-Kind Property Received:
   • Line 12: Enter the fair market value of the relinquished property.
   • Line 13: Enter the adjusted basis of the relinquished property. This is typically the original purchase price plus any improvements, minus depreciation.
   • Line 14: Calculate the realized gain or loss by subtracting the adjusted basis from the fair market value.
   • Line 15: Enter any cash or non-like-kind property received, known as "boot." This could include cash received or debt relief.
   • Line 18: Calculate the recognized gain, which is the lesser of the realized gain or the boot received.
   • Line 19: Determine the basis of the replacement property by adjusting the basis of the relinquished property for any gain recognized and any boot received.

Example: Let’s say you sold a rental property for $500,000, with an adjusted basis of $300,000. You used Deferred.com as your qualified intermediary to facilitate the exchange. You identified and acquired a replacement property worth $500,000 within the required time frames. You received no boot in the transaction.

On Form 8824, you would report the $500,000 sale price and the $300,000 adjusted basis, resulting in a realized gain of $200,000. Since you received no boot, your recognized gain would be $0, allowing you to defer the entire gain. The basis of your new property would be the adjusted basis of the old property ($300,000), adjusted for any recognized gain (none in this case).

5. Additional Forms: Depending on your specific situation, you may need to complete additional forms. For instance, if you received boot, you might need to report it on Schedule D (Capital Gains and Losses) or Form 4797 (Sales of Business Property).
6. Consultation and Review: Given the complexity of 1031 exchanges, it’s advisable to consult with a tax professional to ensure all details are accurately reported. At Deferred.com, we emphasize the importance of a pre-closing analysis to identify potential boot items and ensure complete tax deferral.

By following these steps and using Form 8824, you can accurately report your 1031 exchange on your tax return, ensuring compliance with IRS regulations and maximizing your tax deferral benefits.