Click below to download the Form 8824 Worksheets. You can find instructions to the Form 8824 Worksheets in the paragraphs following.
INSTRUCTIONS TO FORM 8824 WORKSHEETS
There are no specific instructions provided by the 1031 Regulations on how to determine "cash received", "cash paid" or "net mortgage relief" in exchange transactions where both exchange cash and financing cash are used to acquire Replacement Property, service non-transactional costs such as loan acquisition costs, investment related costs and take-outs by the taxpayer. Tax reporting of 1031 Exchanges by tax professionals varies widely and there is no consistent approach utilized. A computational approach referred to as the "balancing of the equities" method is frequently used even though it is not prescribed by the Regulations. Use of the "balancing of the equities" approach will usually cause taxable income to occur as a result of the presumption that exchange cash was used to pay for the above referenced costs on a Replacement Property closing as distinguished from cash received from financing on the Replacement Property. Use of exchange cash for these purposes is viewed as a take-out of exchange cash resulting in taxable boot. As a result, we are not in favor of the use of the "balancing of the equities" approach to reporting 1031 exchanges and do not recommend any approach which assumes that exchange cash is being used for costs other than exchange expenses (transaction costs)
We have developed the enclosed worksheets for use in calculating the information used to report 1031 Exchanges on Form 8824 and herein enclose a copy. We hope that this worksheet will help with these reporting issues that present difficulties in reporting 1031 Exchanges. However, we recognize that almost all Exchanges are different and that this worksheet might or might not work for any given Exchange. It is offered as a possible tool for the use of our clients and their tax professionals.
In referencing closing statements to report a 1031 Exchange, we suggest the use of the following Rules Of Thumb which these worksheets attempt to apply —
Sale of the Exchange Property - Assume cash received is the same as the sales proceeds of the property minus cash used to payoff any debt secured by the property. "Debt" includes principal, accrued interest and any tax prorations debited to the seller.
Exchange Expenses - Assume that all exchange expenses are being serviced by the use of exchange cash as distinguished from the use of financing cash. Exchange expenses are those expenses which result solely as a result of the sale or acquisition of property and include title insurance, commissions, exchange fees, recording fees and other costs directly related to the sale or acquisition of real estate or in connection with the 1031 Exchange (transaction expenses). Exchange expenses do not include payment of tax prorations, tenant security deposits, rent prorations, utility escrow deposits, accrued interest, etc. (investment costs). On the replacement leg, exchange expenses do not include loan acquisition costs, funding of tax and insurance escrows, prepayment of investment expenses such as accrued interest or hazard insurance, etc. (investment costs).
Purchase of Replacement Property - Assume cash paid to acquire the Replacement Property is the same as the purchase price minus the amount of financing used to acquire the property. Assume the amount of financing used for acquisition of the property is the gross amount of the loan minus financing used to pay loan acquisition costs, investment costs, and cash-out to the taxpayer. Assume all uses of cash other than acquisition of the Replacement Property are being serviced by use of financing proceeds as distinguished from exchange cash. Assume that all exchange expenses are being serviced by exchange cash as distinguished from financing cash.
Although we favor use of this approach we are not in a position to guarantee acceptance by the IRS of this strategy for reporting 1031 Exchanges. Taxpayers are advised to consult with their tax professionals as to the utility of this worksheet approach and related reporting theory. Please contact us if we can help with any questions or with any suggestions for enhancement of the worksheets.