Solomon C, Lao, CCIM. Your Partner In Commercial Real Estate.
Tax Season Issues...Taxpayers must report their exchange on the tax return for the year in which the exchange begins. The exchange is reported on Form 8824, "Like-Kind Exchanges." This form requests dates of exchange transactions, the date properties were "identified" and financial information obtained from the closing settlement statement.
For the sale of depreciable rental or business property the taxpayer will also need Form 4797, "Sale of Business Property." For the sale of non-depreciable investment property, the taxpayer will need Form 1041 Schedule D, "Capital Gains and Losses."
Refer to Rev. Rul. 72-456 and Reg. 1.1031(k) -1(g)(7)(ii) for tax treatment of closing costs in an exchange. Rev. Rul. 72-456 deals specifically with brokers' commissions but is considered a guideline for treatment of other closing costs. The basic rule is that closing costs reduce realized gain on the relinquished property, reduce boot received and are added to the basis of the replacement property.
Remember, if the taxpayer relinquished property after October 18th, they have less than 180 days in which to complete their exchange. The actual deadline is the date their tax return is due, typically April 15th. The taxpayer must complete an extension to file their tax return in order to obtain a full 180 day exchange period.
Be aware that the IRS generally has three years in which to audit a tax return. However, the statute of limitations is extended if a taxpayer fails to report more than 25% of their gross income. The tax savings from a deferred exchange often activate this extension.
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