Form 8824 has to be filed for every 1031 exchange, even in a year when zero gain is recognized. Its three parts cover the exchange details, related-party status, and the gain calculation that separates deferred gain from recognized gain. Weak documentation or a miscalculated basis is what creates audit exposure.
Why Form 8824 gets filed even when no tax is due
Every 1031 exchange has to be reported on Form 8824, including years when not a dollar of gain is recognized. The form is how the IRS tracks which properties changed hands, when, and how much gain was deferred versus recognized. Leave it off and the deferral isn't secured; the entire gain becomes taxable.
The confusion is understandable. No gain recognized this year feels like nothing to report. But the deferral only exists because the form documents it. You file in the year the replacement property is received, because that is when the exchange is complete and the gain calculation locks in.
The form runs in three parts, each asking for something different.
Part I: the exchange itself
Part I captures the basic facts: what was sold, when, what was bought, and when.
The 45/180 timeline
Lines 1a-1d ask for the sale date of the relinquished property and the identification and receipt dates for the replacement.
The sale date is the closing date of the property disposed of. The identification date is 45 calendar days later. The receipt date is 180 calendar days from the sale.
These are exact counts, not estimates. Writing "close to" or "approximately" invites trouble, because the IRS reads the calendar literally. A sale on March 15 puts the identification date on April 29, which is 45 days exactly. Write May 1 and you have missed it by a day, and the identification is invalid. The receipt has to land on or before day 180: a closing on day 179 or 180 is compliant, a closing on day 181 fails the whole exchange.
Property descriptions
Lines 2 and 3 describe the relinquished and replacement properties. Write enough that a stranger could identify the exact parcel: the legal description, or at minimum street address, city, state, and county.
"Rental property in California" or "commercial real estate" is the kind of vague entry that draws questions. The IRS is checking that the property sold and the property bought are genuinely like-kind, and a specific description is what shows the rule was followed.
Values
Lines 4 and 5 ask for the adjusted basis and fair market value of the relinquished property; the FMV of the replacement follows.
Adjusted basis is the relinquished property's cost as carried on the client's books, reduced by accumulated depreciation. Not the purchase price from years ago, but the current figure from the tax return or depreciation schedule. The relinquished FMV is usually the gross sale price on the closing statement, unless liabilities complicate it (more on boot below). The replacement FMV is the purchase price on the replacement closing statement.
The qualified intermediary
Lines 6a-6c ask whether a qualified intermediary was used and record its details. In a modern 1031 the answer is nearly always yes, and you provide the QI's name, address, and EIN.
The QI is the conduit that keeps the exchange non-taxable: sale proceeds flow to the QI rather than to your client. Without one, the IRS can treat the deal as a sale followed by a reinvestment, which is taxable. Keep the engagement letter, the exchange agreement, and the QI's accounting statement showing how proceeds moved from sale to replacement purchase.
Part II: related-party exchanges
Part II applies when the relinquished and replacement properties both involve related parties: client and spouse, client and child, or entities the client controls.
The rule is a two-year hold. Both properties must be kept for at least two years after the exchange date. Dispose of either one inside that window and the entire original gain is recaptured, taxable in the year of disposition.
A family land swap
Maria exchanges raw land (basis $100K, FMV $400K) for raw land owned by her sister (FMV $400K). Both sign the exchange agreement on Day 0.
If her sister sells that land on Day 400, inside the two-year window, Maria has to report the recapture. Her $300K deferred gain becomes recognized, and she files Form 8824 again that year to report it.
This is the follow-up that gets missed. The advisor files in Year 1 when the exchange completes, then stops watching the properties. If a related-party disposition happens and no Form 8824 follows, the IRS assesses the tax when it examines the return. A calendar reminder for two years out, when the monitoring period ends, closes the gap.
Part III: the gain calculation
Part III is the arithmetic. It computes the realized gain, adjusts for boot received or paid, and splits the result into recognized gain and deferred gain.
Realized gain is the amount realized minus the adjusted basis of the relinquished property. The amount realized is the gross sale price, plus any liability the buyer assumes (an old mortgage or note), minus selling expenses (commission, attorney fees, title insurance, escrow).
A worked example
Maria sells a rental property.
Sale side (relinquished)
- Gross sale price: $925,000
- Old mortgage assumed by buyer: $180,000
- Realtor commission (6% of $925,000): $55,500
- Other closing costs (attorney, title): $4,500
- Total selling expenses: $60,000
- Adjusted basis: $310,000 (original cost $450,000 minus $140,000 accumulated depreciation)
Purchase side (replacement)
- Purchase price: $975,000
- New mortgage: $250,000
- Cash Maria paid at closing: $50,000
- Exchange expenses (QI fees, 1031 advisor): $12,000
Step 1, amount realized. $925,000 sale price plus $180,000 assumed liability minus $60,000 selling expenses = $1,045,000.
Step 2, realized gain. $1,045,000 minus the $310,000 adjusted basis = $735,000. That is the full economic gain.
Step 3, boot received. Boot is anything non-like-kind, including a net reduction in debt. Maria's debt went from $180,000 to $250,000, an increase of $70,000, so there is no mortgage boot. She received no cash; she added $50,000. Boot received is $0. (Her $50,000 is boot paid, which reduces exposure but creates no recognized gain here.)
Step 4, recognized gain. Recognized gain is the lesser of realized gain or boot received: the lesser of $735,000 and $0, which is $0. Maria recognizes nothing and defers $735,000.
Step 5, new basis. New basis is the old adjusted basis plus boot paid plus recognized gain minus boot received: $310,000 + $50,000 + $0 - $0 = $360,000.
Maria paid $975,000 for the replacement, so why is her basis only $360,000? Because basis carries over from the old property instead of resetting to the new price. The $615,000 gap between the $975,000 price and the $360,000 carryover basis is gain not yet recognized, riding inside the property, waiting to surface if she ever sells without exchanging again.
Land allocation from the appraisal splits the $360,000 basis:
- Land (35%): $126,000, not depreciable
- Building (65%): $234,000, depreciated over 27.5 years at $8,509 a year
Had the replacement cost only $500,000, the basis would be lower and recognized gain higher, because the smaller purchase would leave Maria with mortgage or cash boot.
Mapping the numbers onto the form
Maria's example lands on the form like this.
Part I
- Line 1a, relinquished sale date: exact closing date
- Line 1b, identification deadline: 45 days from sale
- Line 1c, receipt date: exact replacement closing date
- Line 2, relinquished description: legal or street address
- Line 3, replacement description: legal or street address
- Line 4, relinquished basis: $310,000
- Line 5, relinquished FMV: $925,000
- Line 6a, replacement FMV: $975,000
- Line 6c, QI involved: Yes
Part III
- Line 24, adjusted basis of relinquished: $310,000
- Line 25, basis of replacement: $360,000
- Line 26, boot received: $0
- Line 27, gain recognized: $0
- Line 28, gain deferred: $735,000
These line numbers are illustrative; check the current year's IRS instructions for exact placement.
Six mistakes that create audit exposure
1. Basis that ignores depreciation
A client bought a property ten years ago for $500,000 and tells you the basis is $500,000. But the building has been depreciating at $10,000 a year, so the real adjusted basis is $400,000. Pull the prior year's return and depreciation schedule rather than trusting memory.
2. Basis that isn't reduced by deferred gain
After an exchange, it's tempting to treat the replacement as a fresh purchase and put $975,000 on Line 25. The correct figure is the carryover basis, $360,000 in Maria's case. Lower basis means lower depreciation going forward, which routinely surprises clients. A basis tracker, shown to the client, explains why their tax basis sits so far below what they actually invested.
3. Dates written loosely
The 45-day identification and 180-day receipt deadlines are requirements, not suggestions. Count carefully and record the exact dates. If identification falls on April 29, the form says April 29, not "late April."
4. Skipping the form because gain is zero
Filing when zero gain is recognized is not optional; it is the point. The form is the documentation that a 1031 exchange happened at all. "Nothing to report" is the error, because the deferral only holds when the form records it.
5. Related-party exchanges with no follow-up
You file Part II in Year 1, then the two-year hold slips your mind. If the related party disposes of the property on Day 400 and no Form 8824 follows, the IRS finds it on audit. Set a tickler for 24 months from the exchange date to confirm both properties are still held, and file again immediately if one was sold.
6. Boot missed beyond cash
It's easy to check whether cash changed hands and stop there, ignoring mortgage boot and closing-cost boot. Boot is cash received, plus the drop from old debt to new debt, plus any non-like-kind property or non-qualifying closing costs paid from exchange funds. Run the debt math every time: old debt of $200K against new debt of $150K is $50K of mortgage boot, even if no cash moved.
Documents to gather before you start
Collect these before preparing the form.
Relinquished side
- Closing statement (HUD-1 or Closing Disclosure) showing sale price, old-debt payoff, commission, and closing costs
- Depreciation schedule showing accumulated depreciation and current adjusted basis
- Original purchase documentation to verify initial basis
- Any prior Forms 8824, if this property came from an earlier 1031, to confirm the carryover basis
Exchange administration
- Exchange agreement signed by client and QI, showing identification and receipt dates
- QI accounting statement showing how proceeds moved from sale to acquisition
- Identification letter from client or QI, confirming which replacement was identified and when
Replacement side
- Closing statement showing purchase price, new mortgage, down payment, and closing costs
- Property appraisal, if available, allocating value between land and building
- Replacement deed
Supporting
- All closing-cost invoices (attorney, title, inspections, appraisals)
- Any QI correspondence on boot or deferred-gain calculations
If the exchange involves mortgage or cash boot, also request:
- An itemized closing-cost breakdown to identify which costs came from exchange proceeds
- Any cash distributions from the QI, even if zero
Related resources
For basis mechanics, see Basis Tracking After a 1031 Exchange: Advisor Worksheet and Example. For the different flavors of boot, see Boot for Advisors: Cash Boot, Mortgage Boot, and Hidden Boot. To calculate the tax savings from the deferral, use the 1031 Exchange Tax Savings Calculator.
Part I describes the exchange, Part II applies when related parties are involved and starts a two-year monitoring clock, and Part III calculates the deferred gain. The work holds up only with disciplined documentation: both closing statements, the QI accounting, the exchange agreement, the identification letter, depreciation schedules, and any prior Forms 8824.
Frequently asked questions
When is Form 8824 due?
[Form 8824](https://www.irs.gov/forms-pubs/about-form-8824) is filed with the return for the year the replacement property was received. For a calendar-year taxpayer who received the replacement in 2025, that means the 2025 return, due April 15, 2026, or later on extension. The exchange itself must finish inside the 180-day window, but the reporting waits until the replacement is received.
Where does the Line 25 basis figure go next for depreciation?
Line 25 is the basis in the replacement property, and it becomes the starting point for the depreciation schedule. You allocate it between land, which isn't depreciable, and building or improvements, depreciated over 27.5 or 39 years depending on the property class. Because Line 25 carries over the basis from the relinquished property, it usually sits well below the purchase price, which is why depreciation deductions drop in later years and clients are caught off guard.
How do you report a partial exchange?
A partial exchange is one where the client receives boot, meaning cash or a net reduction in debt. Part III handles it: realized gain is reduced by basis and adjusted for any boot paid, then recognized gain is the lesser of realized gain or boot received, with the rest deferred. If realized gain is $150K and boot received is $40K, you recognize $40K and defer $110K. Both numbers come off Form 8824.
Do related-party exchanges require follow-up reporting in subsequent years?
Yes. Part II identifies a related-party exchange, meaning family members, entities the client controls, and the like. The rule that matters: both the relinquished and replacement properties must be held for at least two years after the exchange date, and if either is disposed of sooner, gain may be recaptured. That makes it a two-year monitoring obligation, not a one-time filing; if a premature sale happens, you report it on Form 8824 for that year.
What if the client did multiple exchanges in one tax year?
File a separate Form 8824 for each. Every exchange has its own identification period, dates, and properties, so each needs its own form and its own Part III gain calculation. A client who sold two properties in the same year files two.
What triggers IRS scrutiny on Form 8824?
Common triggers: basis that doesn't reconcile with prior returns or depreciation schedules; deferred gain that vanishes when the replacement is later sold, meaning the carryover-basis adjustment was missed; related-party exchanges with no documented follow-up, such as a replacement later gifted or sold; line-item errors in dates, property descriptions, or values; and boot treatment that doesn't match the closing documents. The IRS cross-references Form 8824 against the later Schedule D when the replacement is sold, so basis and deferred gain have to tie out.