Where do boot and recapture from a 1031 exchange go on Form 4797 and Schedule D?

Line 21 carries its own destination: Form 4797, line 16

The 2025 Form 8824 prints the answer on the line. Line 21 reads “Ordinary income under recapture rules. Enter here and on Form 4797, line 16,” and line 16 of Form 4797 sits in Part II under the heading “Ordinary gain or (loss) from like-kind exchanges from Form 8824.”

From there it is arithmetic. Form 4797 combines lines 10 through 16 on line 17, and an individual carries line 17 to line 18b and then to Schedule 1 (Form 1040), Part I, line 4, where it is taxed as ordinary income rather than at capital gain rates.

Line 21 itself is a limitation, not the full depreciation figure. For section 1245 real property the Form 8824 instructions take the smaller of the depreciation adjustments allowed or allowable, capped at the line 19 realised gain, or the line 20 gain plus the fair market value of non-section 1245 like-kind property received.

Line 22 splits two ways, and the split depends on what you sold

Line 22 is line 20 minus line 21, and the form says to enter it “here and on Schedule D or Form 4797, unless the installment method applies.” The instructions resolve the choice: a gain from property used in a trade or business goes to Form 4797, line 5 or line 16, and a gain from a capital asset follows the Schedule D instructions, using the date of the exchange as the date of the gain.

For a rental house, an apartment building or a net-leased store, that means Form 4797, line 5, which is labelled “Section 1231 gain or (loss) from like-kind exchanges from Form 8824.” Line 5 feeds line 7, and if line 7 is a gain and you carry no nonrecaptured section 1231 losses on line 8, the instruction on the form is to enter the line 7 gain as a long-term capital gain on Schedule D.

Land held purely for appreciation and never rented is the case that goes straight to Schedule D, because it is a capital asset rather than section 1231 property. Nothing else about the exchange changes.

• The IRS's own worked example in the Form 8824 instructions: realised gain $120,000 on line 19, $40,000 on line 20, $35,000 of section 1245 recapture on line 21, $5,000 on line 22, $40,000 on line 23 and $80,000 deferred on line 24.
• Those two figures then land on two different forms and two different tax rates: $35,000 on Form 4797, line 16 at ordinary rates, $5,000 on line 5 as section 1231 gain.

Part III of Form 4797 stays empty, and that is the step most preparers get wrong

Part III of Form 4797, lines 19 through 32, is the recapture engine for an outright sale: it takes gross sales price, basis and depreciation for each property, computes section 1245 and section 1250 recapture on lines 25b and 26g, and routes the totals to line 13 and line 6. None of that applies to a like-kind exchange, because Form 8824 lines 21 and 22 already did the work under the section 1245(b)(4) and section 1250(d)(4) limits.

The only two entries an exchange produces on Form 4797 are line 5 and line 16. If you also see a property listed in Part III with the exchange's numbers, the same gain is being counted twice.

Line 1a is a related trap. It asks for gross proceeds reported to you on Form 1099-S “that you are including on line 2, 10, or 20.” Exchange figures arrive on lines 5 and 16, so the 1099-S your title company issued for the relinquished sale is not included there — which is exactly why the exchange has to be reported at all.

Your 25 percent depreciation tax appears on Schedule D line 19, not on line 21

Residential rental property placed in service after 1986 is depreciated straight line, and Form 4797 line 26 instructs that “if straight line depreciation was used, enter ‑0‑ on line 26g.” There is no “additional depreciation,” so line 21 of Form 8824 is normally zero and none of your depreciation is ordinary income.

It is not forgiven, though. Under §1(h)(1)(E) unrecaptured section 1250 gain is taxed at 25 percent, and §1(h)(6)(B) caps the amount from section 1231 dispositions at the year's net section 1231 gain. The figure reaches the return through the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions, whose line 18 says to enter the result on Schedule D, line 19.

The worksheet was written around sales, not partial exchanges: lines 1 to 3 assume a Part III entry on Form 4797 and line 12 covers dispositions “for which you didn't make an entry in Part I of Form 4797 for the year of sale.” Neither description fits a 1031 with boot cleanly, so have your preparer document which line was used and why. Your CPA or attorney should sign off on that choice before the return goes out.

• Hypothetical: you sell a rental for $900,000, take $60,000 of cash boot, and have claimed $180,000 of straight-line depreciation.
• Form 8824 line 20 caps recognised gain at the $60,000 of boot; line 21 is zero; line 22 is $60,000 and goes to Form 4797, line 5.
• Because the recognised gain is smaller than the depreciation claimed, the whole $60,000 is unrecaptured section 1250 gain at 25 percent rather than 15 or 20 percent — the ordering is set out in is boot taxed as recapture or capital gain first.

Boot that lands in January: §453(f)(6) and Form 6252 push the tax into the next year

Reg. §1.1031(k)-1(j)(2) disregards the qualified escrow or the qualified intermediary in deciding when you received payment for installment-sale purposes. Its Example 1 is the straddle: property transferred 22 September, the replacement delivered the following 11 March with $20,000 of leftover escrow cash, and the taxpayer “is treated as receiving payment on March 11” and may report the $20,000 in the later year under the installment method.

§453(f)(6) supplies the arithmetic: total contract price is reduced by property received without recognition of gain, gross profit is reduced by the amount not recognised by reason of §1031(b), and like-kind property is not a “payment.” In practice the whole boot is gain because the exchange has already absorbed the basis.

On Form 6252, line 24 is the installment sale income, line 25 is the part that is ordinary under the recapture rules, and line 26 says to enter the balance on Schedule D or Form 4797. The Form 8824 instructions add that a section 1252, 1254 or 1255 recapture amount from line 21 also goes on Form 4797, line 15. Paragraph (j)(2)(iv) makes all of this conditional on a bona fide intent to complete the exchange when it began.

Line 24 is the number that never becomes income

Line 24 is line 19 minus line 23, and it appears on no other form. The deferred gain is absorbed by line 25, the basis of the like-kind property received, which is why the tax reappears only when you sell for cash: see what tax you owe when you finally sell.

There is one situation where line 24 is reported. The instructions say to file Form 8824 for the year of the transfer and also for the two years following a related-party exchange; if line 9 or line 10 of Part II is answered “Yes” and none of the exceptions on line 11 applies, you complete Part III again and report the line 24 amount on that year's return as if the exchange had been a sale.

Breakwater Exchange is a 1031 exchange broker, not your tax preparer, and we place sellers into DST interests rather than file returns. If the reason you are reading a boot page is that your replacement came up short on value, a DST sized to the gap is one way to remove the line 22 figure altogether — see leftover cash after a 1031.