The IRS offers a tax form, 8824, for corporations who have exchanged their entity type. This form is used to report the exchange to the IRS and to calculate any gain or loss of the exchange. They must file the form within 30 days of the exchange and include information about both the old and new corporations.
There are many reasons a corporation might want to switch from one entity type to another. Perhaps the company is expanding into new markets and needs to change its structure to reflect its new business goals.
Or maybe it has outgrown its original structure and needs to become an LLC or S-Corp in order to take advantage of certain tax benefits.
Whatever the reason, it’s important to understand that exchanging corporation types comes with its own set of tax implications.
This article will give you a clearer understanding of what Form 8824, Form 8824 instructions, and its purpose. You will also learn how and when to file with Form 8824.
What is Form 8824?
Form 8824, Corporation Exchange, is used by US corporations to report their stock and bond transactions with the SEC. It is also used by shareholders to report their stock and bond transactions with each other.
The form must be filed annually no later than February 15th of the following year. There are a number of items on the form that are important for shareholders to know, such as the number of shares traded, type of security traded, and the price at which it was traded.
Normally, a capital gain occurs when you sell something for more than what you bought; a capital loss occurs when you sell it for less than what you spent. Both can affect your taxes.
However, if you buy a similar property right away to replace the one you sold, the tax legislation refers to this as a “like-kind exchange,” allowing you to defer part or all of the tax consequences. For like-kind transactions, the Internal Revenue Service (IRS) uses Form 8824.
What is the Purpose of Form 8824?
Use Parts I, II, and III of Form 8824 to report each exchange of business or investment real property for real property of a like-kind. Form 8824 figures the amount of gain deferred because of a like-kind exchange.
Part III computes the amount of gain required to be reported on the tax return in the current year if cash or property that isn’t of a like-kind is involved in the exchange. Also, the basis of the like-kind property received is figured on Form 8824.
Certain members of the executive branch of the federal government and judicial officers of the federal government use Part IV to elect to defer gain on conflict-of-interest sales. Judicial officers of the federal government are the following.
- Chief Justice of the United States.
- Associate Justices of the Supreme Court.
- Judges of the:
- United States courts of appeals;
- United States district courts, including the district courts in Guam, the Northern Mariana Islands, and the Virgin Islands;
- Court of Appeals for the Federal Circuit;
- Court of International Trade;
- Tax Court;
- Court of Federal Claims;
- Court of Appeals for Veterans Claims;
- United States Court of Appeals for the Armed Forces; and
- Any court created by an Act of Congress, the judges of which are entitled to hold office during good behavior.
What happens during a Conversation?
A like-kind exchange does not eliminate taxes; they are only postponed. Let’s say you bought a piece of company or investment real estate for $20,000 and sold it for $30,000 ($30,000 – $20,000 = $10,000 profit).
Rather than paying capital gains tax on the $10,000 profit, the like-kind transaction permits the profit to be “passed on” to the new company property.
Unless you undertake another like-kind exchange, the gain is passed on to the next property you buy; the $10,000 payment will be considered in the tax computation when you eventually sell the new property.
When Should You File?
If you transferred the property to another person in a like-kind exchange during the current tax year, you must file Form 8824 with your tax return. Also, for the two years after the year of a related party exchange, file Form 8824.
It’s critical to remember the following when filling out the form:
- Part I of Form 8824 describes the old and new properties.Â
- Part II of the form is used only when a like-kind exchange involves “related parties”—family members or entities in which you have a controlling interest.
- Then, Part III is for reporting any gains or losses resulting from the transactions that make up the exchange; this is how the IRS keeps track of your taxable income or tax-deductible loss.
- Part IV of the form is only for federal employees and deals with conflict-of-interest requirements.
Exchanges that are permitted
Like-kind trades are possible for both persons and businesses. However, the property in question must be used for business or investment purposes. In 2018, only real property, such as a rental home, will be eligible for like-kind exchanges.
The IRS maintains that like-kind swaps don’t have to be exact replacements—for example, a warehouse for a warehouse—but they must be of the same “nature, character, or class.”
A like-kind exchange would swap a warehouse with land for vacant land or a factory with land, including real estate.
Deadlines and Exclusions
Several types of property are not eligible for a like-kind exchange under the law:
- Stocks, bonds, and other securities in a partnership business
- Ownership interest in a partnership business
- Suing rights
- Certificates of trust or a stake in a trust as a beneficiary. Also, with like-kind exchanges, you have a set amount of time to find and buy a substitute property:
• You have 45 days from the date you sell to find a potential replacement property and notify the seller or your intermediary.
• You have 180 days from the transaction date to complete the purchase of the replacement property.
If you miss these dates, the sale of the property may be recorded in the current tax year.
How to fill out IRS Form 8824 to record a 1031 exchange
When a 1031 exchange is completed, it is reported on IRS Form 8824 and the regular tax return. The 180-day exchange period begins when the initial surrendered property is completed, and the completed exchange is reported for the tax year.
If the final replacement property is not transferred until the following year, Form 8824 will not be completed until that time. This may necessitate a timely extension of the tax year.
Completing Form 8824, the income tax return, can be difficult.
Since 1991, we’ve produced an annual workbook and 8824 worksheets to assist exchangers in completing the required Form 8824.
Each line on the form has simple instructions. A chart depicting the Exchange Expense distribution of each settlement cost and the IRS 8824 form are included in the worksheet.
The workbook is updated once a year and is available for free.
Worksheet Form 8824 Instructions
In exchange transactions where both exchange cash and financing cash are used to gain replacement property, service non-transactional costs.
These come as loan acquisition costs, investment-related costs, and take-outs by the taxpayer, the 1031 Regulations provide no specific instructions on how to determine “cash received,” “cash paid,” or “net mortgage relief.”Â
Tax experts report 1031 Exchanges in various ways, and there is no one-size-fits-all strategy. Even though the Regulations do not require it, a computational method known as the “balancing of the equities” method is widely utilized.
The premise that exchange currency was utilized to pay for the charges mentioned above on a Replacement Property closing, as opposed to cash obtained through financing on the Replacement Property, will almost always result in taxable income when using the “balancing of the equities” approach.
For these reasons, exchange cash is considered a take-out, resulting in taxable boot.
As a result, we do not propose using the “balancing of the equities” approach to reporting 1031 exchanges, nor any strategy that presumes that exchange funds are being used for exchange expenses.
Form 8824 PDF
Instructions for Form 8824 (Print Version)PDF
FAQs
How do you fill out a 8824?
Line 1: List the address or legal description and type of property relinquished (sold). Line 2: List the address or legal description and type of property received. Line 3: List the month, day, and year relinquished property was originally acquired. Line 4: List the date the relinquished property was transferred to the buyer.
Who should file form 8824?
Use Parts I, II, and III of Form 8824 to report each exchange of business or investment property for property of a like kind. Certain members of the executive branch of the Federal Government and judicial officers of the Federal Government use Part IV to elect to defer gain on conflict-of-interest sales.
Who fills out form 1031?
Individuals, C corporations, S corporations, partnerships (general or limited), limited liability companies, trusts, and any other taxpaying entity may set up an exchange of business or investment properties for business or investment properties under Section 1031.
