When you click 'Yes' to Special Handling, it stops the asset depreciation, does understand it should stop and does not calculate the Section 1031 information. The steps above on February 25th will walk you through the process. If you deviate from that, it may be the reason you are showing taxable gain. I agree, you paid more for the property you received than the property you gave up was worth (based on your statements). In this case there would be no taxable gain.
In the trade is there a rental space or simply your new home? This is important to handle the Section 1031 like kind exchange. The information below may be helpful.
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).
Buy Up or Boot:
If you 'buy 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.
@psyadam
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