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Investors & landlords
Hi there, I also spent a ton of time reading and thinking about all this and created my own spreadsheets etc. to make sense of it all, and I have finally reached the point where I think it (mostly) makes sense. Your latest description is closer but not quite right IMO. I'll summarize and send the best links I could find that helped me (in addition to Pub 527 and the instructions for 8824).
But 1st, note that another detail (which is not discussed in this thread) is the distinction between fundamentally 3 different types of "costs" on your closing statement (which end up in 3 different places): I spent a lot of time on that. Refer to Pub 527.
(1) You have pre-paids (such as insurance and funding an impound account), and pro-rations for taxes and insurance and HOA and things that have to do with owning the property, not selling it: these things are resolved on Schedule E as expenses.
(2) "Costs associated with obtaining a loan". These costs are anything you would NOT have if you were paying cash, and don't forget the Lender's Title Insurance. These costs are amortized for the new property or properties in full, under "Intagibles" loan cost, and you put the life of the loan for the amortization period.
(3) Whatever is left are the "Total Exchange Cost" (see examples in Pub 527) and are used on 8824 in the boot calculation (since cash received may be used to cover these costs). Here is a good link I used:
https://firstexchange.com/closing-costs-in-an-exchange
One of the things I learned is that those basic rules to fully defer your gain are somewhat misleading:
(1) step up in price paid vs. price sold and (2) replace or increase the debt...simple...however, it turns out that if you increase your loan amount which is quite possible if not probable you may only have a partial exchange. If you increase your debt substantially more then 8824 will quickly tell you that you may have more "equity received" than "equity given", which means you received cash/boot from the exchange. This happened to me and I put cash into the deal!! So that's where the expenses come into play and that cash received may be used to cover your "Total Exchange Expenses" which are only the expenses described above (for both properties you sold and purchased). Here is another link on that subject:
https://homeguides.sfgate.com/can-amortize-rental-property-77587.html
Now, back to depreciation, and if you have a CPA that really understands RE and exchanges I would suggest you use them to review whatever you come up with. Here is my attempt to summarize and some links that helped me.
1) YES, line 25 on 8824 is the "New Cost Basis for the Replacement Property", which is the starting point on the asset entry, and yes you can start by looking up the tax assessors property information to have a reference for the percentage land vs. Improved. Then you can use that percentage on the New Cost Basis to divvy up between land and improved. Then, as many do, you can split the "improved" up between the structure (27.5 years), Land Improvements (15 years) and carpet/appliances (5-years) and often there is a "special" depreciation of 50% the 1st year or even (as we have currently) 100%. Turbo Tax handles this and I think gives you the option to take it or not.
NOTE: This approach ENDs the depreciation schedules on the property given up. In fact you edit that asset and say you are taking it out of service and enter the date (you sold the property) and Turbo Tax will pro-rate the amount for 2019.
This is a pretty summary of how to do that: (see the procedure from @Husam22)
Now, maybe when you mentioned carrying the existing depreciation schedule forward (?) you were referring to more complicated approach, where you split up the "new cost basis" between the "Adjusted Basis of the relinquished property", which is up to you to calculate, and....(continued below)
---------
Adjusted Basis
The adjusted basis of property is usually the original cost of the property, adjusted for various items after you acquired it. Additions to basis include improvements you made to the property and nondeductible assessments for improvements (sidewalks, utilities, etc.). Decreases to basis include casualty and theft losses deducted. Depreciation claimed and section 179 deductions taken also decrease your basis. In general, calculate adjusted basis in this manner:
1. Original cost, including sales tax, purchase expenses, etc.
PLUS
2. Improvements (with a useful life of more than one year)
3. Nondeductible assessments for improvements (sidewalks, utilities,
etc.)
MINUS
4. Depreciation claimed
5. Section 179 deduction taken
-----------
and the "added basis" from "stepping up" assuming a full deferment of your gain. These values are on 8824. It's not 100% clear to me the advantage of doing this, but here is an explanation of how you do it:
Note: I did not take this approach: I'm splitting everything up into 3 new replacement properties so I don't need to make it any more complicated.
Here is another question that could come up, if you have carry-forward passive losses. YES, these are carried forward to the replacement property: https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/we-sold-a-rental-prop...
That's all I have for now, after about a weeks worth of research.
Good Luck,
Victor
