Navigating Tax Season

According to Regulation §1.1245-2(b), taxpayers are generally required to report all gains or losses on the disposition of capital assets, including transactions that result in capital gains or losses, in a separate computation on their tax return (Reg. §1.1202-1(a)). However, there is no statutory authority that specifically requires the reporting of a full tax-deferred exchange. Nevertheless, it may be advisable to attach a schedule to report a problematic exchange in order to start the statute of limitations running on the issue.

When reporting an exchange of like-kind property, it can be done on Schedule D or Form 4797, depending on which applies. The instructions for Schedule D (Form 1040) state that all exchanges must be reported, including fully tax-deferred exchanges. While there is no statutory authority for this instruction, it presents a dilemma. Some taxpayers who are more aggressive in their tax compliance may choose to report as little as possible, reasoning that if the exchange is non-taxable, the IRS would not impose a penalty later on. On the other hand, conservative advisors may recommend reporting the exchange even if no tax is generated, in order to start the clock running on the statute of limitations. If the taxpayer decides to report the exchange, it should be done as simply as possible, such as with a short “memo box” recapitulation on a single sheet of paper that can be attached to Schedule D or Form 4797.

In addition to Schedule D or Form 4797, if a taxpayer has a like-kind exchange, they must also file Form 8824—Like-Kind Exchanges. This form requires specific information about the exchange, including descriptions of the properties, dates of disposition and acquisition, and certain related party information. The rest of the form deals with computations of realized gain or loss, recognized gain, basis of property received, and deferred gain.