TT is designed to handle the vast majority of tax applications that apply to the majority of taxpayers. Section 1031 transactions are not one of those transactions that taxpayers typically encounter or attempt to do themselves. As such, as noted by @Anonymous_, TT may need to be tweaked to get to the result you want.
Based on that, I have the following thoughts and comments:
- You indicate that "I think I have it all working correctly... the cost basis of my replacement property comes from the adjusted cost of the two residential rental properties I relinquished."
- Based on your notation in item 1, how are you seeing this and coming to this conclusion if you don't see any asset worksheet detail, etc.?
- Is TT completing a form 8824? Does this arrive at the correct basis post transaction?
- I am also attaching an article as I believe it will provide some useful details in determining which depreciation method you want to choose. The default in TT may not be the result you want, especially if you are considering a cost segregation.
- I am also concerned with your statement that "IRS says I need to change to 39 [year depreciation]". Are you saying that you have been using an incorrect method of depreciation on the relinquished properties? If that is the case, then you have an issue that needs to be addressed by completing a form 3115 to correct the depreciation method issue.
- Bottom line is you most likely need to make some adjustments in TT depending on which method of depreciation you choose. This may require you to "sell" the relinquished properties for no gain or loss and start fresh for the replacement property; this assumes you elect the simplified method as noted in the linked article.
- https://www.thetaxadviser.com/newsletters/2020/mar/deductions-like-kind-exchanges-cost-segregation.h....
*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.
