Post Exchange Action Items and Considerations

As explained in our “Exchange Steps” article and Timeline the exchange is “complete” if (1) the Exchanger uses all exchange funds to acquire all properly identified replacement property, or (2) at the expiration of the exchange period.

**If the Exchanger only completed a partial exchange or were unsuccessful in their exchange and there are funds remaining in the exchange account, please check in with our Team on the next steps and rules governing the timely release of funds.

Congratulations, you’ve completed your 1031 exchange! What are your next steps?

• Provide your documents to your tax advisor. If you have not already informed your tax advisor of your 1031 exchange, you should do that promptly as the Exchanger/their advisor will need to report the 1031 exchange on your federal income tax return, as explained below. It is recommended that you provide all exchange agreements and closing documents for the relinquished and replacement properties to your tax advisor as soon as possible.
• Federal Tax Reporting, Report your Exchange to the IRS. A 1031 Exchange should be reported to the IRS on the tax return for the tax year that the relinquished property was transferred, even if your exchange bridges two tax years. This reporting can be done by completing IRS Form 8824and filing it with your federal income tax return. If the exchange will not be completed by the filing deadline, the Exchanger can file for an extension using IRS Form 4868. Furthermore, if the Exchanger has “boot” and will be paying some tax due to a partial or unsuccessful exchange, the Exchanger should complete IRS Form 4797 to report gains from the sale or exchange of business property. It should be noted that the Exchanger may also be required to report their 1031 exchange on their state tax return, however, some states have very specific requirements for non-resident sellers which should be discussed with their tax advisor. Check out our article to read more about non-resident taxes and withholding. For considerations related to reporting exchanges that bridge two years, check out our detailed Article: “Navigating Tax Straddles”.
• State Tax Reporting. Report the exchange on your state tax return and consider any state specific requirements.
• If you completed a reverse or improvement exchange, update the titleholder LLC information and insurance.Consider compliance with State reporting rules regarding ownership. At the conclusion of your reverse exchange, the titleholder LLC will be transferred from Legal 1031 to the Exchanger. It is critical that the Exchanger review and if necessary, amend the state registration and insurance policies of the LLC(s) to be consistent with the current ownership/membership. When the LLC is transferred, Legal 1031 or other outdated information may remain on record with the state until updated. Exchangers should be able to amend the same by visiting the state webpage where the LLC is registered. If changes cannot be made through the website, if necessary, Legal 1031 is happy to help sign-off on any forms needed to process the change. You should also ensure that you comply with any annual filing requirements.
• Entities as titleholder of Replacement Property. If exchanger used a business entity in the exchange, they should consult with a tax or legal advisor before making any changes to the entity on title, or to the title of the replacement property. Always be sure to consult with your tax advisor before transferring title to replacement property to a different taxpayer, or if making changes to the entity that owns it, such as adding members or partners.