The 1031 exchange allows you to completely close out the property you sold. Everything from the sold property will move into the new property.

The IRS says:

How do you compute the basis in the new property?

It is critical that you and your tax representative adjust and track basis correctly to comply with Section 1031 regulations.

Gain is deferred, but not forgiven, in a like-kind exchange. You must calculate and keep track of your basis in the new property you acquired in the exchange. 

The basis of property acquired in a Section 1031 exchange is the basis of the property given up with some adjustments.  This transfer of basis from the relinquished to the replacement property preserves the deferred gain for later recognition.  A collateral affect is that the resulting depreciable basis is generally lower than what would otherwise be available if the replacement property were acquired in a taxable transaction. 

When the replacement property is ultimately sold (not as part of another exchange), the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.

For complete 1031 information, please see this link.

Is the gain avoided if you eventually make the exchanged property your primary residence?

No, the gain is eliminated only if inherited. 

Amy:

I was advised by Turbotax to add the loss carryover from the old property to the new property. However, when I viewed my form 8582 I saw that both properties had now the loss carryover.

Is there a better way to transfer the loss carryover from a sold (1031) property to a new property?

@DJFAULDS The purpose of the 1031 is to defer paying taxes on the gains. If you have a loss, I don't know why you would do a 1031 exchange. But, you have your reasons. Since it is done, you would need to carry that loss into the new building. The old building would be marked as sold. Property that has been disposed of, no longer carries a loss. 

Thank you Amy for your insights, just to recap:

I have a significant capital gain deferred by using a 1031 exchange. The losses are from operating the rental activity over the years and are all passive losses carryforward each year. I already marked the old building as disposed under a 1031 exchange, but on the 8582 PAL form, it allocated the losses for the year and then added a small loss for the new building (so far so good). I was then advised to input the loss carryover from the old building in TT to the new building. Now the form 8582 has recalculated the carryover losses on both buildings, nothing in TT automatically transferred the old building losses to the new building. Seems wrong but can't get good help from TT!

@DJFAULDS Just to let you know, you might not receive an answer to your question because it falls under the category of an out of scope topic.   Here is a link to the TurboTax service agreement.

Hello,

I sold the first property with a 1031 exchange and also sold another rental property with gain and this property is not in 1031 exchange, as per IRS reg. we need to carry over relinquished properties PAL loss to replacement property. But when I input gain information it absorbed all the PAL from relinquished property loss as well. Do you think I am doing the correct approach?  

Would you please comment?

@DJFAULDS 

I'm running into this same question for 2024.  

I tried entering the new (replacement) property with carryover passive losses ($62,822), but then I end up with more than two times that amount; $62,822 for the relinquished property and $62,822 + ($xxx) for the replacement property.  I can see these on the 8582 form.  

What did you decide to do?  Did you "ride out" the PALs on the relinquished property for the rest of the year and then add them (manually?) to the replacement property as carryover for the next tax year?  

I'm also interested in how you transferred the depreciation from the relinquished property to the replacement property.  

Any ideas?  

The following will be an overview of how to handle the replacement property assets for Section 1031 like kind exchange.

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:

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.

• Where do you enter a like-kind  or Section 1031 exchange?
• IRS Fact Sheet for Section 1031 Exchange

When you have your TurboTax return open you can use the following steps to update the original assets for the exchange.

1. First use the Search (upper right) > Type rentals > Press enter > Click on the Jump to... link
2. Or Wages & Income > Rental Properties and Royalties > Update > Continue to Rental and Royalty Summary > Edit the property
3. Scroll to Assets/Depreciation  > Click Update > Select 'Edit' next to each asset
4. Edit beside each asset > Continue to the Tell Us About This Rental Asset
5. Select the checkbox beside 'This item was sold, retired, .... traded in ....etc. > enter the date it was traded (sold/retired)
   1. 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.
6. 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)
7. 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.
8. Answer 'Yes' to Special Handling.

Next you will complete the like kind exchange, Form 8824 (Section 1031 exchange):

1. Use the Search (upper right) > Type like kind > Press enter > Click on the Jump to... link
2. Select the checkbox beside 'Any additional like-kind exchanges (section 1031)' > Continue
3. Complete the information for the 'Real estate given up'  and 'Like-Kind Property Given Up' > Continue
4. Name the event > Continue > Complete the information for the 'Like-kind property received'
5. If you did not give unlike property in the exchange click 'No' and  continue past these screens, if 'Yes' answer the questions.
6. Enter any exchange expenses (sales expenses) > Continue to see your deferred gain.

If you marked the original assets as sold, traded, etc (see 6. above) then go back to your rental activity and then enter new assets with the exact same information as the property given up with a new name, but with the same date placed in service as the old property, for all assets that are part of the exchange.

Enter a new asset for any buy up/added cash in the exchange including the purchase/selling expenses you paid in the trade. The new asset will begin depreciation on the completion date of the trade/like kind exchange.

Passive loss carryover should be the same number as 2023.

@Tuckerb89

[Edited: 04/06/2025 | 11:46 AM PST]