It depends. It's not double taxation when you buy up and use the 1031 exchange keeping your original asset depreciation in place as part of the new property.
@KrisD15 was explaining the steps to use Option 2, Simplified Method. It seems to me by carrying the exchanged property over as part of the new property and then adding any buy-up as a new asset would be easiest and allow you to defer any tax on recapture because you did buy up. I will provide a bit more detail and the steps to complete this exchange in TurboTax if you choose to stick with Option 1. This allows you to postpone any taxable depreciation recapture because you did buy-up.
The following guidance is how you enter a 1031 exchange in TurboTax and will provide guidance for the current and new assets for depreciation.
Depreciation Rules:
The basic concept of a 1031 exchange is that the basis of your Old Property rolls over to your New Property. In other words, if you sold your Old Property for $100,000, and bought your New Property for the same, your basis on the New Property would be the same. It makes sense then that your depreciation schedule would be exactly the same, and does not change! In other words, you continue your depreciation calculations as if you still own the Old Property (your acquisition date, cost, previous depreciation taken, and remaining un-depreciated basis remain the same).
If you "bought-up" in your exchange (your New Property cost more than you sold your Old Property), the answer is easy – you treat the buy up part as you would a new addition to an existing property. In other words, you treat the amount of the buy-up the same as you would the cost of construction, for example, of a garage added to an existing house – the cost is the amount of the buy-up; the date you start depreciating it is the date you purchased the new property; and the depreciation method you use is the method most appropriate for that type of property in the year you bought the New Property (regardless of the method you used for the original house). If you think of it this way, then it's easy, even if your property is a large office building or a more complex purchase.
When you have your TurboTax return open you can use the following steps to update the original assets for the exchange.
- First use the Search (upper right) > Type rentals (or schedule c) > Press enter > Click on the Jump to... link
- Or Wages & Income > Rental Properties and Royalties/Self employment > Update > Continue to Rental and Royalty Summary or Self employment > Edit the property
- Scroll to Assets/Depreciation > Click Update > Select 'Edit' next to each asset
- Edit beside each asset > Continue to the Tell Us About This Rental Asset
- Select the checkbox beside 'This item was sold, retired, .... traded in ....etc. > enter the date it was traded (sold/retired)
- You can choose not to select this and just change the name of the assets given up in the trade to identify them with the new property. The depreciation for the year will not change on these assets.
- Answer the question about whether it was 100% business > Leave the original date it was placed in service (may be purchase date or later depending on your circumstances)
- Continue to the screen 'Confirm Your Prior Depreciation'
- The amount displayed is only for prior years and does not include the current year.
- Continue until you see the current year amount displayed and make a note to add the two amounts together for the Section 1031 like kind exchange.
- This completes the asset portion of the trade.
- Answer 'Yes' to Special Handling.
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