I'm helping my daughter with her Starker exchange (Sec 1031). This is an area where I'd say I have a general understanding of the tax concepts but have never actually prepared a Form 8824. To a large extent the instructions for Form 8824 are vague and somewhat contradictory to what you see presented on the form itself.
She asked for my help because the program, on the page "Different property received", was asking for what seems to be a "balancing" amount of "other (not like-kind) property."
There was none. My daughter got a new house and a new mortgage, and that's it. Of course you can't go forward in the interview until you put $14,804 in a box on that page, which immediately increases taxable income because it's considered "boot."
The interview is dealing with the following input:
OLD Property
Adjusted basis of property given up $160,980
FMV of property given up 219,000
Loan assumed by buyer 161,196
NEW Property
FMV of property acquired $215,000
Loan assumed by buyer of new property 172,000
so it looks like the "shortfall" TurboTax is looking for is comprised of:
- Excess of new mortgage assumed by buyer over seller's $10,804
- Shortfall of FMV of buyer's new property over FMV of property given up 4,000
Essentially, it's the difference between the exchange of equity.
It's not clear to me if the $4,000 should be taxed as gain since the FMV of the property acquired was slightly less than the FMV of the property relinquished.
The $10,804 amount was a little more difficult to narrow down. It seems to be a BUG in TurboTax's calculation of line 15 of the Form 8824:
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EDIT: upon further review the TurboTax programming here does appear to be correct based on the IRS instructions. In their typical ponderous fashion the instructions refer to THE EXCESS, IF ANY of liabilities assumed by the other party over the liabilities assumed by you. The Smart Worksheet has left out "cannot be a negative number."
If I enter $14,804 on the "Different property received" then having the correct math here on the "Smart Worksheet" would reduce the gain down to $4,000, though I'm not sure if that's even correct.
I can override TurboTax to get to the position I'm guessing is correct after filling out Form 8824 by hand, but maybe I'm missing something completely.
Questions:
- Is the prompt for $14,804 on the "Different property received" page an error of some sort, or is it somehow "legitimate" due to the differences in equity?
- Does the fact that she received a property with a FMV $4,000 less than the FMV of the property she gave up trigger a recognizable gain? The property given up and the property acquired were pretty much as "like kind" as possible, both single family homes used as rentals.
Thanks.
