<p><em>There is a <a href="https://www.accruit.com/blog/reporting-1031-exchange-irs-form-8824&quot; target="_self">newer version</a> of this post.</em></p>

<p>With the first quarter of 2016 nearly over, owners of heavy equipment are busy finalizing their 2015 financial statements.&nbsp; Once those financial statements are complete, accountants will be busy preparing the related tax returns.&nbsp; For those owners who have completed a 1031 like-kind exchange, a <a href="https://www.irs.gov/pub/irs-access/f8824_accessible.pdf&quot; target="_blank">Form 8824</a> will need to be prepared and filed with the Internal Revenue Service (IRS).</p>

<h2>What is Form 8824?</h2>

<p>Titled, “Like-Kind Exchanges (and section 1043 conflict-of-interest sales)," Form 8824 serves two primary purposes:</p>

<ul>
<li>To allow business owners to report the deferral of gains through Section 1031 tax deferred exchange transactions</li>
<li>To allow certain members of the Federal Government to report the deferral of gain through conflict-of-interest sales</li>
</ul>

<p>The form is divided into four distinct parts, including:</p>

<ul>
<li>Part I – Information on the like-kind exchange</li>
<li>Part II – Related Party Exchange Information</li>
<li>Part III - Realized Gain or (Loss), Recognized Gain, and Basis of Like-Kind Property Received</li>
<li>Part IV – Deferral of Gain From Section 1043 Conflict-of-Interest Sales</li>
</ul>

<p>For the purposes of reporting any like-kind exchange activity, equipment owners need only be concerned with the first three parts of the form.&nbsp; Part IV is simply not required for someone that isn’t a member of the Federal Government’s executive branch, or are considered judicial officers under the same.</p>

<h2>Part I – Information on the Like-Kind Exchange</h2>

<p>This section covers the basics of the 1031 exchange, including:</p>

<ul>
<li>Description of the relinquished property (property sold)</li>
<li>Description of the replacement property (property acquired)</li>
<li>Date the property given up was originally acquired</li>
<li>Date the property replacement property was actually received</li>
</ul>

<p>Part one also asks if any like-kind property was either sold to, or purchased from a related party.&nbsp; If the answer is yes, then the form’s preparer must complete Part II.&nbsp; If the answer is no, then the preparer may skip Part II and move on to complete Part III.</p>

<h2>Part II – Related Party Information</h2>

<p>It’s interesting to note, this section does not require any calculations.&nbsp; It simply asks for some basic information about the related party transaction, including:</p>

<ul>
<li>The related party’s name, address and relationship</li>
<li>Timing of any dispositions (by the related party) of the property received from the equipment owner</li>
<li>Timing of dispositions related to the property acquired by the equipment owner</li>
</ul>

<h2>Background on Related Parties</h2>

<p>Part II addresses very specific concerns regarding what is known as basis shifting.&nbsp; In these transactions, <a href="/blog/1031-tax-deferred-exchanges-between-related-parties">related parties were working together by exchanging low basis property for high basis property</a> with the immediate plans to sell, at a gain, the lower basis property.&nbsp; By following this strategy, related taxpayers were effectively reducing the gain on the sale of the low basis property.&nbsp; For like-kind exchange purposes, related parties are defined under Internal Revenue Code Section 267(b) or 707(b)(1) and can include:</p>

<ul>
<li>Family members, including brothers and sisters, husbands and wives, lineal descendants, ancestors</li>
<li>Individuals and corporations, where more than 50% of the value of the stock is owned directly or indirectly by or for the individual</li>
<li>A corporation and a partnership if the same persons own more than 50% in the value of the outstanding stock of the corporation and more than 50% of the capital interest or profits interest in the partnership.</li>
</ul>

<h2>Part III – Realized Gain or Loss, Recognized Gain, and Basis of Like-Kind Property Received</h2>

<p>This entire section is dedicated to determining the results of the like-kind exchange.&nbsp; Of the 14 total lines contained within this section, eight are simple addition and subtraction fields.&nbsp; This leaves the form’s preparer with some additional work to gather the data for the remaining six fields.&nbsp; It’s critical to avoid being fooled by the form’s apparent simplicity.&nbsp; The tax preparer must understand the precise meaning of this section’s terminology and each line’s requirement in order to complete the form correctly.&nbsp; Amongst other things, Part III will require the following:</p>

<ul>
<li>Fair market value and adjusted basis of other property given up</li>
<li>Cash received and fair market value of other property received</li>
<li>Net liabilities received by the other party</li>
</ul>

<h2>Summary</h2>

<p>For the vast majority of exchanging equipment owners part four of Form 8824 will simply not apply, and as such it can be ignored.&nbsp; However, equipment owners should carefully report each and every exchange of like-kind property using the first three parts of this form.&nbsp; In doing so, equipment owners can effectively communicate to the IRS why the disposition(s) of their equipment, should not trigger any income taxation.&nbsp;</p>

<p>&nbsp;</p>

<p>When selling or purchasing an investment property in a <a href="https://www.accruit.com/property-owners/1031-exchange-explained&quot; title="1031 Exchange Explained">1031 exchange process</a>, certain selling expenses paid out of the sales or <a href="/services/1031-exchange">1031 exchange</a> proceeds will result in a taxable event for the exchanger. Routine selling expenses such as broker commissions or title closing fees will not create a tax liability. Operating expenses paid at closing from 1031 proceeds will create a tax liability for the exchanger.</p>

<p>The IRS, through various revenue rulings has provided guidelines for allowable and unallowable closing and settlement costs based on common geographical practices and standards.</p>

<h2>Allowable closing expenses for <a href="https://www.accruit.com/blog/complex-issues-concerning-section-1031-tax…; title="irs 1031 exchange">IRS 1031 exchange</a> purposes are:</h2>

<ul>
<li>Real estate broker’s commissions, finder or referral fees</li>
<li>Owner’s title insurance premiums</li>
<li>Closing agent fees (title, escrow or attorney closing fees)</li>
<li>Attorney or tax advisor fees related to the sale or the purchase of the property</li>
<li>Recording and filing fees, documentary or transfer tax fees</li>
</ul>

<h2>Closing expenses which result in a taxable event are:</h2>

<ul>
<li>Pro-rated rents</li>
<li>Security deposits</li>
<li>Utility payments</li>
<li>Property taxes and insurance</li>
<li>Associations dues</li>
<li>Repairs and maintenance costs</li>
<li>Insurance premiums</li>
<li>Loan acquisition fees: points, appraisals, mortgage insurance, lenders title insurance, inspections and other loan processing fees and costs</li>
</ul>

<p>To reduce the taxable consequences of these operating, financing and other closing fees, try to:</p>

<ul>
<li>Pay security deposits, pro-rated rents and any repair or maintenance costs outside of closing, or deposit these amounts in escrow with the closing agent.</li>
<li>Treat accrued interest, prorated property tax payments or security deposits as non-recourse debt that the exchanger is relieved of on the sale of their old property, which could be offset against the debt assumed on the replacement property. Note: this would only work if mortgage debt is obtained on the replacement property purchase that exceeds the mortgage debt paid off on the sale of the relinquished property.</li>
<li>Match any prepaid taxes or association dues credited to the investor against the unallowable closing expenses listed on the settlement statement.</li>
</ul>

<p>Check with your tax advisor prior to the closing to review the closing settlement statements to determine if there is an opportunity to <a href="https://www.accruit.com/blog/primer-1031-exchanges-and-related-types-ex…; title="Avoid a taxable transaction in your 1031 exchange">avoid a taxable transaction in your 1031 exchange</a>. It’s possible that an exchanger has a long term loss carry forward or non-recognized passive operating losses that could offset the taxable amount.</p>

<p>Please note that all material provided in this newsletter is for informational purposes only and the author is not providing legal, tax accounting or other professional services. The accuracy of the information provided as it pertains to your situation is not guaranteed. Please seek professional consultation if legal, tax accounting or other expert assistance is required.</p>

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<p>In this video, Paul Holloway demonstrates a basic calculation of tax on the cash-out of an investment property of real estate and the potential to defer these taxes by reinvesting sales revenue into a 1031 like-kind exchange.</p>

<p>Want to see more short videos on 1031 topics? <a href="https://www.youtube.com/c/Accruit&quot; target="_blank">Subscribe to our YouTube Channel!</a></p>

<p>&nbsp;</p>
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<p>Denver, Colorado – January 20, 2015<br />
<br />
Accruit, the nation’s leading provider of qualified intermediary and 1031 like-kind exchange program solutions, offers broker-accredited <a href="/sites/default/files/accruit--continuing-education_1.pdf" target="_blank">1031 Exchange workshops for real estate continuing education credit</a>. These complimentary classes are appropriate for anyone interested in better understanding the processes and requirements for the execution of successful 1031 real estate exchanges, including realtors and real estate agents, investment property owners, certified financial planners, accountants, and attorneys.</p>

<p>Workshops are available for two, three, and four hours, for which students may receive continuing education (CE) credit towards real estate license renewal, and cover the following topics:<br />
<br />
• History of Tax Deferred Exchanges<br />
• 1031 Exchange Terminology<br />
• Steps to Complete an Exchange<br />
• Specific Examples of Exchanges<br />
• Issues of Choosing a Qualified Intermediary<br />
• Miscellaneous Issues in Exchanging</p>

<p>Accruit’s continuing education courses are taught by Certified Exchange Specialists® with more than 20 years of experience in real estate exchanges. Accruit also provides 3–5-minute videos that will educate anyone involved in the 1031 process on their YouTube channel, <a href="https://www.youtube.com/accruit">youtube.com/Accruit</a>.</p&gt;

<p>Section 1031 of the tax code allows owners of qualified real estate or personal property (such as business use assets) to sell property without having to pay taxes on the gain from the sale, as long as this revenue is used to acquire like-kind replacement property. To realize the benefits of a 1031 exchange, a property owner generally employs the services of a qualified intermediary (QI) to facilitate the exchange. Accruit will work with you to properly structure your tax-deferred exchange.</p>

<p><a href="https://www.accruit.com/sites/default/files/accruit--continuing-educati…; target="_blank">Download the PDF</a> and call or e-mail Accruit to schedule a workshop for your company or real estate group:</p>

<p>1-866-397-1031<br />
<a href="mailto:1031u@accruit.com">1031u@accruit.com</a><br />
&nbsp;</p>

<p>In 2007, Michael Bay directed the film <em>Transformers</em>, which some might argue was his greatest film to-date. <em>Transformers </em>follows a young man who gets tossed into an alien war between the Autobots and the Decepticons, both of whom are on Earth disguised as different motor vehicles but can transform into huge warring robots in a moment. It was way back in 1984 when Hasbro launched the Transformer line of toys that inspired the recent films. Toys that had kids around the world singing the refrain, <em>Transformers! More than meets the eye!</em></p>

<p>Qualified intermediaries (QIs) are more than meets the eye as well. No, they don't transform into vehicles or robots, but they are often seen in a limited light. You’re likely aware of the QI's primary duties in a 1031 exchange:</p>

<ul>
<li>Structuring the 1031 exchange</li>
<li>Preparing the related documentation</li>
<li>Safeguarding proceeds from the sale of the relinquished property(ies)</li>
<li>Continuous monitoring and advising to ensure compliance with federal and state 1031 and QI requirements</li>
</ul>

<p>While these are important responsibilities, a QI can add value in the following areas, as well:</p>

<ul>
<li>Exchange related information and expertise</li>
<li>Speaking commitments</li>
<li>Co-sponsoring events</li>
<li>Continuing education courses</li>
<li>Participating in client-facing meetings</li>
</ul>

<h2>Qualified intermediaries provide 1031 exchange-related information and expertise.</h2>

<p>A common phrase heard among QIs is they do not provide tax advice. However, what they can provide is detailed exchange information. How many times does a like-kind exchange (LKE) fail to get off the ground because the exchanger does not have the right information and decides to back out of the LKE? If a person or company has the chance to save 30-40% by conducting an exchange, having a free conversation with a 1031 exchange expert on potential options makes a lot of sense. Paying taxes is never pleasant, but paying unnecessary taxes is ill-advised.</p>

<h2>Qualified intermediaries are available as speakers.</h2>

<p>Throughout the year brokers, bankers, CPAs, and other industry groups organize speaking engagements at conferences and company parties, in front of clients and prospects. QIs, as speakers, are often available to present at such occasions, providing educational value free of charge.</p>

<h2>Qualified intermediaries will often co-sponsor events.</h2>

<p>Similarly, QIs can also help by co-sponsoring events. The real estate industry puts on many events that draw a variety of professionals (title closers, escrow agents, and realtors). QIs are in a position to benefit from shared relationships or contact with new groups of professionals and therefore are often interested in co-sponsoring such events.</p>

<h2>Qualified intermediaries are great sources of continuing education.</h2>

<p>The opportunity to provide training to individuals in need of credit hours remains an effective use of the qualified intermediary’s expertise and time.&nbsp; Realtors, brokers, accountants, and lawyers are among the professionals who require continuing education hours on an annual basis, and many QIs can provide webinar or in-person training to meet those needs. QIs enjoy this opportunity because it allows the QI to introduce themselves and their companies to a new and focused group.</p>

<h2>Qualified intermediaries are available for client-facing meetings.</h2>

<p>Tax topics can make anyone cringe, so it is no wonder that realtors, brokers, and other advisors do not enjoy diving into the details when faced with a client interested in a 1031 exchange. Frequently, a QI is brought in to speak directly with the client, explain the process, and answer their questions.</p>

<h2>Summary</h2>

<p>Your qualified intermediary will structure the 1031 exchange, prepare the related documentation, and safeguard the proceeds from the sale of the relinquished property. The QI will also monitor and advise throughout the exchange to ensure compliance. But there is much more a QI can do to advise, educate, and partner with those interested in learning more about the 1031 exchange process.</p>

<p>In today’s economy any proper advantage should be pursued, whether that is a marketing strategy, discounted pricing, or a tax benefit like a 1031 exchange. When working with a QI, remember to take advantage of their expertise. Qualified intermediaries may have yet to master the art of transforming into robots or vehicles, but they are indeed <em>more than meets the eye</em>.</p>

<p>Photo: <a href="https://www.flickr.com/photos/jquiz/543625766&quot; target="_blank">Jesus Q,</a></p>

<p>What is boot under Section 1031 of the tax code? In relation to like-kind exchanges, there are two classic types of boot - cash boot and mortgage boot. Learn about each in this short video.</p>

<p>Want to see more short videos on 1031 topics? <a href="https://www.youtube.com/c/Accruit&quot; target="_blank">Subscribe to our YouTube Channel</a>!</p>
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