Tax Reporting Requirements When an S-Corp Does a 1031 Exchange

Tax day is almost here, and we're getting a lot of questions from clients about how to report property exchanges to the IRS. This article focuses on the topic of S-Corp property exchanges and IRS reporting requirements.

When an S-Corp Exchanges Property

When an S-Corp exchanges a property do the shareholders report the exchange via Form 8824 on their own 1040? If so, should each shareholder receive the relevant transaction info (acquisition/disposition dates, share of gross sales price etc., etc.) with their Schedule K-1?

Answers from the IRS

To answer questions like these, it's always best practice to go right to the IRS for answers. This link to the IRS website offers some insight to the question. Here are some relevant excerpts so you don't have to read through the entire article:

"Partners and S corporation shareholders. If you received a Schedule K-1 from a partnership or S corporation reporting the sale, exchange, or other disposition of property for which a section 179 expense deduction was previously claimed and passed through to its partners or shareholders, you must report your share of the transaction on Form 4797, 4684, 6252, or 8824 (whether or not you were a partner or shareholder at the time the section 179 deduction was claimed)."

"If the disposition was a disposition of property given up in an exchange involving like-kind property made during the partnership's or S corporation's tax year, any information you need to complete Form 8824."

"Partnerships (other than electing large partnerships) and S corporations do not report these transactions on Forms 4797, 4684, 6252, or 8824. Instead, they provide their partners and shareholders the information they need to report the transactions."

1031 exchanges can complicate your annual tax reporting, but it's important to be proactive and accurately report your exchange to ensure its success.

• Start Your Exchange: If you have questions about 1031 exchange tax reporting requirements, or anything regarding 1031, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

State vs. Federal Treatments for 1031 Exchanges

Different states have different treatments for 1031 exchanges and not all of the states comport to the federal standard.

Pennsylvania

One state in particular is Pennsylvania. In Pennsylvania at the state level they don't recognize deferred exchanges unless they’re simultaneous swaps. So the delayed exchanges that we're all accustomed to in which we have 45 days to identify and 180 days to complete - those work fine at the federal level but if you're selling property in Pennsylvania you will not get the deferral on the 1031 exchange if it is a delayed or non-simultaneous exchange.

A Trap for the Unwary

So the trap for the unwary is it you may think that it’s all uniform across the board, but each specific state can have different nuances and interpretations of the tax code. For folks in Pennsylvania you may recognize the gains at the state level but be able to have a partial victory in deferring them at the federal level.

• Start Your 1031 Exchange: If you have questions about state taxation as it relates to 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Minnesota Deed Tax & Transfer Tax in a 1031 Exchange

In this 1031 FAQ video, Jeff Peterson talks about Minnesota deed tax and transfer tax in a 1031 exchange. Watch more 1031 educational videos here.

• Start Your 1031 Exchange: If you have questions about Minnesota deed tax, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved

Reporting a 1031 Exchange with Form 8824

Form 8824 is a little worksheet that you attach to your tax return to report the 1031 exchange. The 8824 is sort of like the answer to the IRS’s question of "where’s my money?" Because when you sell the relinquished property, the title company, law firm, or closing agent that sells and closes that relinquished property is required to report that sale on a 1099 so the IRS is going to know that you sold your relinquished property and they’re going to be wondering where the money is.

Filing Form 8824

The form 8824 answers that question by saying we sold that relinquished property and here's the replacement property that we purchased, and it gives the IRS all the information they need to know to line up and see how the dots are connected between the sale of the relinquished property and the purchase of the new property.

Sometimes taxpayers that sell say in one year and acquire the replacement property in the subsequent year are uncertain what year they file the 8824. Is it the year from which the sale occurred or is it in the year that the purchase occurred? The answer is you need to file the 8824 for the tax return applicable to the year you sold the relinquished property. The IRS is going to receive that 1099 for the year in which you sold your relinquished property and they're going to be asking where's my money. And the answer will come from the 8824 in the year in which you sold your relinquished property.

• Start Your 1031 Exchange: If you have questions about form 8824, feel free to call me at 612-643-1031.

Defer the tax. MAXIMIZE your gain. 

© 2016 Copyright Jeffrey R. Peterson All Rights Reserve

1099-S Reporting of 1031 Exchange Transactions

Many people conducting 1031 exchanges are concerned about getting 1099’d on the sale of their relinquished property. They are worried that if the IRS is notified of their sale, that it will jeopardize their exchange.

Taxes & 1031 Exchanges

Title companies, escrow companies, attorneys, mortgage brokers, real estate brokers, and other people involved in closing real estate transactions (the "Reporting Person") for the “sale or exchange” of real estate must report these transactions to the IRS under 26 U.S. Code § 6045(e).  Penalties are imposed if the Reporting Person fails to comply with these rules.

Under Treasury Regulation 1.6045-4(b)(1), the term “sale or exchange” includes any transaction properly treated as a sale or exchange for federal income tax purposes, whether or not these transactions are currently taxable. So the requirements of § 6045 also apply to 1031 tax deferred exchanges under § 1031 of the Internal Revenue Code as reportable transactions.

At the outset of a 1031 tax-deferred exchange, the Reporting Person conducting the closing of the sale of the relinquished property may not know if the exchange will be fully completed, or if the like-kind replacement property will be received by the taxpayer within the 180 exchange period, or even if the replacement property will qualify for tax-deferral. None of that matters though because the Reporting Person is still legally required to report the transferor’s proceeds to the IRS using form 1099-S.

Who is the Taxpayer that is Issued the 1099-S?

Typically, the "Reporting Person" is the taxpayer who:

• Transfers or sells the property being sold

• Conveys the property to the buyer

• Would be entitled to the payment of the proceeds or to whom the proceeds is credited to such person’s account. 

The term “transferor” includes any persons conveying “ownership interest” in real estate such as:

• Fee simple interests

• Life estates

• Reversions

• Remainders

• Perpetual easements

• Lease-hold estates of 30 years or more, including any period for which such rights may be renewed at the option of the holder.

In a standard forward exchange, the proper person to be issued the 1099 is the taxpayer conducting the exchange — the seller conducting the exchange — and not the qualified intermediary.

After the exchange is completed the seller or exchanger will inform the IRS of the connection between the sale of the relinquished property and the purchase of the replacement property on IRS form 8824 with their federal tax return. This allows the IRS to understand how the first 1099 relates to the tax-deferred exchange, and the full story of events will be revealed.

• Start Your Exchange: If you have questions about the 1031 exchange and 1099 reporting, feel free to call me at 612-643-1031.

Defer the tax. MAXIMIZE your gain. 

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved