Tax Return Reporting

This information should prove helpful to your tax return preparer. Even though your exchange may be entirely tax-free, an information return (form 1099) was issued in your name by the title company. The IRS in matching documents will look for the sales proceeds to be reported on your return on forms 4797 and 8824, or on schedule D and form 8824 and instructions. The disclosure should show the property description as a "tax-free exchange -IRC1031" and the form 1099 amount as your "sales price". If the transaction is entirely tax-free, then the basis should show the "sales price" on the form 4797 or schedule D. Please remind your tax return preparer of your exchange transaction and provide them with the closing statements for both the property sold and the property purchased.

Your basis in the replacement property will be your basis in the relinquished property plus any additional cash invested or debt incurred. If you have multiple replacement properties you generally will need to allocate basis in ratio to fair market value. In the event, your relinquished property sold in one tax year and you received "boot" in the exchange, in the next tax year, the boot will generally be taxable in the year received (refer to Reg 1.1031(k)-1(j)(2).

If you entered an exchange transaction in 1996 and did not acquire any or all of your replacement property by the end of your 180 day replacement period which fell in 1997, you should recognize any cash boot as gain in 1997. Refer also to reg 1.1031(k)-1(j)(2). Even though you recognize the gain you recieved in 1997, you will report the tax free exchange in 1996, as discussed in the first paragraph.