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During 2022, I performed a 1031 like-kind exchange, in which I sold a piece of undeveloped land, and used the proceeds towards purchase of a vacation rental house. (This is a way of deferring capital-gains on the property that was sold).

The lawyer who handled the sale of the land (the "relinquished property") issued a "substitute" Form1099-S, which shows the full sale price in box 2 ("gross proceeds") and leaves Box 4 ("X here if property or services received") blank.

I believe this is incorrect and have told the lawyer such, citing this IRS publication: https://www.irs.gov/pub/irs-pdf/i1099s.pdf and quoting (from the top-right of page 4) ""If you are reporting a like-kind exchange of property for which no gross proceeds are reportable, enter -0- (zero) in box 2 and enter an “X” in the checkbox in box 4".

The lawyer's response is "We actually just issue the sale and the amount it was sold for. You would work with your CPA on the details of the net proceeds after expenses or as in your case the reinvestment of the funds."

I have no CPA, and I'm not sure what a CPA would do, besides filing Form 8824 with my return, which of course I am doing.

Is the lawyer incorrect, and if so, what can I do about it ? And more to the point, do I need to somehow include this 1099-S in my Schedule D, and if so, how do I handle that without showing a big capital gain ?

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The lawyer is correct. The 1099-S is issued by the entity that disburses the proceeds of the sale, and they send it to wherever you tell them to send (in your case - the 1031 intermediary). From their perspective they sent the money to you.

You should attach the form 8824 to your tax return and reflect the correctly adjusted basis of the new property on the new depreciation schedule.

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  • I'm doing that - attaching a Form 8824, and using the adjusted basis (essentially the amount I paid for the "replacement property", plus the costs of doing the exchange, minus the gain I deferred from the sale of the "relinquished property") in the depreciation schedule for the replacement property. Mar 1, 2023 at 22:56
  • So the 1099-S shouldn't be reported at all (except implicitly on Form 8824), not on Schedule D ? Mar 1, 2023 at 22:57
  • What is the point of the IRS quote in my OP then ? The lawyer was clearly aware that the money was going to a 1031 intermediary and not to me. Mar 1, 2023 at 22:58
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    @RustyShackleford you report the boot on schedule D, the excess not rolled into the new property. The quote refers to intermediary, the lawyer in your story was not that.
    – littleadv
    Mar 1, 2023 at 22:59
  • Ok, there was no excess, the relinquished only paid for about 1/3 of the replacement. Is it possible the intermediary will issue a 1099-S then, with Box 2 zero and Box4 checked ? Mar 1, 2023 at 23:02

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