1031 Exchange Accounting: Records, Basis and Form 8824

A 1031 exchange lets real estate investors defer capital gains tax when they sell an investment property and reinvest in another qualifying property. It is one of the most widely used tax deferral tools in real estate, but it only works if the transaction and the records are handled correctly.

This article looks at 1031 exchanges from the bookkeeping side: the timeline, the role of the qualified intermediary, the records to keep, how basis carries over and how the exchange is reported. It is general information, not tax advice. The rules are technical, and a mistake can make the full gain taxable, so work with a CPA and an experienced exchange professional before you sell.

For the core rules, see our 1031 exchange rules post and the definition of a 1031 exchange.

The basics and the timeline

Under Section 1031 of the Internal Revenue Code, you can defer gain when you exchange real property held for investment or for use in a business for other like-kind real property. Since 2018, the deferral applies only to real property, not to personal property such as equipment or vehicles. A primary residence does not qualify.

Two deadlines drive every exchange, and both run from the date you transfer the property you are selling:

• 45 days to identify. You must identify potential replacement properties in writing within 45 days, following the IRS identification rules.
• 180 days to close. You must acquire the replacement property within 180 days, or by the due date of your tax return for that year (including extensions), whichever comes first.

These deadlines generally are not extended for weekends or holidays, so put them on the calendar the day you close the sale.

The qualified intermediary

In a typical delayed exchange, you cannot take possession of the sale proceeds, even briefly. If you do, the exchange can fail. Instead, a qualified intermediary holds the funds between the sale and the purchase under a written exchange agreement.

From an accounting perspective, this means:

• The sale proceeds go from the closing directly to the intermediary, not to your bank account
• You record the funds as held by the intermediary, often in a separate asset account, until the purchase closes
• The intermediary sends the funds directly to the closing of the replacement property

Choose the intermediary carefully and confirm how they safeguard funds. Your CPA or attorney can help you evaluate options.

Records to keep

Good records make the tax return accurate and support the exchange if it is ever examined. Keep at least the following:

• The exchange agreement with the qualified intermediary
• Closing statements for both the relinquished and replacement properties
• Your written identification of replacement properties, with the date sent
• Records of the original purchase price, improvements and depreciation for the property you sold
• Statements from the intermediary showing funds received and disbursed
• Loan documents for any debt paid off or taken on

Store these with the property’s permanent records. You will need the basis information again when you eventually sell the replacement property. TenantLoop accounting can hold property-level records and documents alongside the general ledger.

Basis carryover and boot

In a 1031 exchange, the gain is deferred, not eliminated. The deferred gain is preserved through the basis of the replacement property. In general terms, the replacement property’s basis starts with the adjusted basis of the property you gave up, then is adjusted for any additional cash you invested, any gain you recognized and any other items the rules require.

For example, if you sell a hypothetical rental with an adjusted basis of $200,000 for $500,000 and buy a $600,000 replacement with the full proceeds plus $100,000 of new money, your basis in the replacement is roughly $300,000, not $600,000. The details depend on debt, closing costs and other factors, so let your CPA run the actual calculation.

Two related concepts matter in the books:

• Boot. Cash you receive or debt relief that is not offset by new debt is generally taxable to the extent of the gain. Track it separately.
• Depreciation. The carried-over portion of basis generally continues on the old depreciation schedule, while any added basis is typically depreciated as a new asset. Set up the replacement property’s fixed asset records to reflect this. See depreciation.

Reporting on Form 8824

The exchange is reported to the IRS on Form 8824, Like-Kind Exchanges, filed with your tax return for the year in which you transferred the relinquished property. The form summarizes the properties, the key dates, the amount of gain deferred and recognized, and the basis of the replacement property.

Your bookkeeping should give your CPA everything needed for this form: closing statements, adjusted basis, depreciation history, intermediary statements and a summary of any boot. Some states have their own reporting requirements for exchanges as well.

For the broader accounting cycle, see Accounting 101 for rental owners and our real estate accounting basics, or return to the Property Accounting Hub.