What is a 1031 exchange in real estate?

A 1031 exchange (named after IRS Section 1031) allows real estate investors to defer capital gains taxes by reinvesting the proceeds from a sold investment property into a 'like-kind' replacement property. Key rules: (1) The replacement property must be identified within 45 days of closing the relinquished property; (2) The exchange must close within 180 days; (3) To defer all capital gains, the replacement property must be equal or greater in value and you must reinvest all net equity; (4) A qualified intermediary (QI) must hold the proceeds — you cannot touch the money. 1031 exchanges work for any investment real estate: residential rentals, commercial buildings, vacant land, NNN leases. Primary residence and fix-and-flips do not qualify. The tax deferral compounds over time — investors use serial 1031 exchanges to build wealth over decades, ultimately stepping up the cost basis at death, eliminating the deferred gain for heirs.

What is a triple net (NNN) lease?

A triple net (NNN) lease is a commercial real estate lease structure where the tenant pays the three 'nets' in addition to base rent: (1) Property taxes — the tenant pays the real estate taxes on the property; (2) Building insurance — the tenant maintains and pays for property insurance; (3) Maintenance/CAM — the tenant is responsible for maintenance, repairs, and common area maintenance. NNN leases are common in retail (fast food, dollar stores, pharmacies, auto parts) and industrial properties. From an investor's perspective, NNN leases are attractive because they provide passive, predictable income with minimal landlord responsibilities — making them ideal for 1031 exchange buyers seeking management-free ownership. Cap rates for investment-grade NNN properties (McDonald's, Dollar General, CVS, AutoZone) typically range from 4.5-6.5%. Lease terms are usually 10-25 years with rent escalations of 5-10% every 5 years or 1-2% annually.

What is a cap rate in commercial real estate?

Cap rate (capitalization rate) is the primary metric for valuing income-producing commercial real estate. Formula: Cap Rate = Net Operating Income (NOI) ÷ Property Value. Example: A property with $100,000 NOI selling for $1,500,000 has a 6.67% cap rate. NOI = Gross rental income minus operating expenses (taxes, insurance, maintenance, management) — before debt service. Cap rates reflect risk: lower cap rates = lower risk, higher prices (Class A multifamily in major markets: 4-5%); higher cap rates = higher risk, lower prices (secondary markets, older buildings: 7-9%). Cap rates move inversely with interest rates — when interest rates rise, cap rates tend to rise (prices fall). For 1031 exchange buyers: the spread between cap rate and borrowing rate (debt yield spread) determines cash-on-cash returns; a 6% cap rate with 7% mortgage rates creates negative leverage. Current (2026) NNN market: investment-grade single-tenant net lease properties trade at 5-6.5% cap rates depending on tenant credit, lease term, and location.

Form 8824 Instructions: Line-by-Line 1031 Walkthrough

IRS Form 8824 (Like-Kind Exchanges) is the federal tax form taxpayers use to report a 1031 exchange to the IRS. It's filed with the federal tax return for the year the relinquished property closed and discloses the exchange structure, dates, fair market values, adjusted basis, and recognized vs. deferred gain.

GM By Glen Gomez-Meade~10 min read Published 2026 Updated 2026

What it is

Form 8824 is a two-page IRS form that documents a like-kind exchange for federal tax purposes. The form has three main parts: Part I identifies the parties and properties involved; Part II addresses related-party exchanges; Part III computes realized gain, recognized gain (if any), and the new basis in the replacement property.

Who uses it

Any taxpayer who completes a 1031 exchange in a given tax year must file Form 8824 with their federal return. Your CPA prepares and files this on your behalf; your Qualified Intermediary provides the underlying transaction data. Do not skip Form 8824: a 1031 exchange that is not reported on Form 8824 can trigger IRS inquiry.

Part I: Information on the Like-Kind Exchange

Part I is the identifying information section. It covers property descriptions, dates, and whether the exchange involved related parties.

Line 1: Description of property given up: Street address, APN, or legal description of the relinquished property (downleg).
Line 2: Description of property received: Street address, APN, or legal description of the replacement property (upleg).
Line 3: Date property given up was originally acquired: Your original purchase date of the relinquished property.
Line 4: Date you actually transferred your property to other party: Closing date of the relinquished property sale.
Line 5: Date like-kind property you received was identified: The day the identification form was delivered to your QI (must be on or before day 45).
Line 6: Date you actually received the like-kind property: Closing date of the replacement property acquisition (must be on or before day 180).
Line 7: Related-party exchange?: Yes/No. Triggers Part II if applicable.

Part II: Related Party Exchange Information

Part II applies only if you exchanged property with a related party. Related-party exchanges have strict two-year holding period rules on both sides: disposition of either property within two years typically disqualifies the exchange (with narrow exceptions for death or involuntary conversion).

Part III: Realized Gain, Recognized Gain, and Basis Calculation

Part III is where the tax math happens. The form walks through computing your realized gain (what you received, line 17, minus the adjusted basis of what you gave up, line 18), then determines the portion recognized (taxable: typically from boot) and the portion deferred.

Lines 12–14: Other (non-like-kind) property given up: Only if you also gave up property that is not like-kind: its fair market value (line 12), adjusted basis (line 13) and the resulting gain or loss (line 14), which is reported on your return.
Line 15: Boot received: Cash received, plus the FMV of other property received, plus net liabilities assumed by the other party (the debt you were relieved of), reduced by exchange expenses you incurred. Net mortgage relief is boot and lands here.
Line 16: FMV of like-kind property received: Fair market value of the replacement property (upleg).
Line 17: Total received: Line 15 plus line 16.
Line 18: Adjusted basis given up: Adjusted basis of the like-kind property you gave up (original cost plus improvements minus depreciation), plus net amounts paid to the other party (including new debt you took on and cash you added) and exchange expenses not used on line 15.
Line 19: Realized gain or (loss): Line 17 minus line 18: the total economic gain, taxable or not.
Line 20: Gain limited to boot: The smaller of line 15 or line 19, but not less than zero.
Lines 21–23: Recognized gain: Line 21 is ordinary income under the depreciation recapture rules; line 23 (lines 21 plus 22) is the total recognized, taxable gain.
Line 24: Deferred gain or (loss): Line 19 minus line 23: the gain the exchange defers.
Line 25: Basis of like-kind property received: Line 18 plus line 23 minus line 15. This carryover basis drives future depreciation and gain; lines 25a to 25c allocate it by property type.

Common mistakes

Not filing Form 8824 at all: the exchange must be reported
Filing Form 8824 in the wrong tax year (it's the year of the relinquished property sale)
Miscalculating basis on Line 25: which affects future depreciation and gain
Missing related-party disclosure on Line 7
Not reconciling Form 8824 with Form 4797 (business property) or Schedule D (investment property)

Frequently asked questions

What is Form 8824 and what information do I need?

Form 8824 is the federal IRS form that reports a like-kind (1031) exchange with your tax return for the year you transferred the relinquished property. You need the property descriptions, four dates (original purchase, sale closing, identification and replacement closing), the replacement property's fair market value, your adjusted basis in the property you sold, liabilities on both sides, cash boot, and exchange expenses. Your QI's closing statements supply most of it.

Which line of Form 8824 shows the purchase price of the property?

No line asks for the original purchase price directly. What you paid, adjusted for improvements and depreciation, becomes the adjusted basis reported on line 18. The value of the replacement property goes on line 16, and your new basis in it is computed on line 25.

Where does the mortgage paid off on the relinquished property go on Form 8824?

Debt you were relieved of is part of the net liabilities assumed by the other party, which is included in boot on line 15. New debt you take on for the replacement property is part of the net amount paid on line 18, so replacing debt offsets debt relief.

Is Form 8824 a federal or state form?

Form 8824 is a federal IRS form. Some states have their own reporting; California, for example, requires Form FTB 3840 for exchanges of California property into out-of-state property. Ask your CPA about your state.

Do I file Form 8824 or my QI?

You (the taxpayer) file Form 8824 with your federal return. Your CPA typically prepares it using data from your QI's final exchange accounting. The QI does not file it for you.

What if the exchange failed?

If your 1031 exchange failed (missed deadlines or other disqualification), the relinquished sale is reported as a taxable sale on Form 4797 or Schedule D without Form 8824. You do not file Form 8824 for a failed exchange.

Do I need to file a state version of Form 8824?

Depends on the state. Some states (California, Massachusetts, Montana, Oregon) require annual informational filings during the deferral period if they maintain clawback regimes. Verify with a state-specific CPA.

Sources

IRS, Instructions for Form 8824 (Like-Kind Exchanges)
IRS, About Form 8824
Internal Revenue Code section 1031 and Treas. Reg. 1.1031(k)-1 (45-day and 180-day rules)

Updated 2026. General information, not tax or legal advice.

Author

Glen Gomez-Meade

Glen writes The Upleg. More about Glen →

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