Reporting a loss in a 1031 exchange. To avoid paying a large tax on recaptured depreciation, many qualified taxpayers do a 1031 exchange when they have a loss. Usually due to a low adjusted basis resulting from taking a lot of depreciation. The question is, how do they reflect this loss since it must be deferred in an exchange? This is done on the IRS Form 8824, used to report the exchange, by simply adding to the FMV of the replacement property received the LOSS encountered, and showing this on the line 25 as the new total basis for the replacement property. In other words, the loss is simply added to the FMV
of the replacement property to get a new higher basis going forward.
Any questions on the 1031 exchange of real estate, assets or equipment give us a call.