1031 Adjusted Basis Calc

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On form 8824 (like-kind exchanges), there is an entry for "Adjusted basis of Like-kind property"

TT has been tracking this through the years, but apparently provides no help completing this entry.

If I understand correctly, the Adjusted Basis would be:

AB = Purchase Price +Improvements - Depreciation ??

So I would just look to the "Depreciation & Amortization worksheet" report in TT to get the depreciation.

paid 300K

Improvement = 0

Depreciation = 80K

AB =  330K- 80K= 220K?

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On my "Depreciation and Amortization report",  TT has an entry for Amortization for a 2011 refinance.  It appears TT has been depreciating the refinance fee.  I'm not even sure that is proper.

Would this depreciation also be included with the property depreciation in the Adjusted basis calc?

[DianeW777]

Yes, you have the correct formula to arrive at your adjusted basis of the asset.  

Yes the refinance costs are being amortized over the life of the loan from the date of refinance and it is the correct action for these fees.

These will NOT be included as part of the cost basis, but will continue on as though you never exchanged the property.

Likewise the property asset will not change, it will continue on as though you never exchanged the property, although you can rename it to identify your new property.

For more information these links may be helpful:

• IRS Like-Kind Exchange
• Where do I enter a like-kind exchange?

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DianeW777,

I did include the Loan fees into the cost basis for the relinquished property of the exchange.  If you are sure they should not be, then I will remove them.

I have been struggling with how to handle the depreciation for the exchange in TT.

I found this article written by intuit that gives step by step instructions:

https://proconnect.intuit.com/community/individual/help/1040-completing-a-like-kind-exchange-of-busi...

However, after completing steps 1 and 2 in TT 2019, I could not see any affect when this was all imported in to TT 2020.  What should I have seen different?

Also, step 1 basically flags the property as relinquished, should the same be done for the refi fees?

Also, how do you think these instruction would change if the property was relinquished in 2019, and the exchange property was acquired in 2020.   Its seems steps 1 & 2 would be completed in TT 2019, but Step 3 would be completed in TT2020..., but if so, would it render the correct results?   Or should Step 3 occur in TT2019, even though the exchange property is a future 2020 event?

[DianeW777]

The steps above reference software that is not TurboTax, but rather other software platforms (Lacerte, ProConnect or ProSeries).

You can leave the refi fees as part of the exchange, and yes you should flag it as you did the rental asset. It doesn't change the deduction that continues on for the property received, it changes any 'buy up' amount added to your depreciation assets.

The easiest process, since the original property continues on for depreciation and cost basis as though it was the same property is as follows.

Continue the depreciation as though there was no trade. Then with any extra cash that was paid for the replacement property (the property received in the exchange) you set up a new asset and begin depreciation in 2020 as residential rental property using 27.5 year recovery period (depreciation method).

If you buy up in your exchange (your New Property cost more than you sold your Old for), the answer is easy – you treat the additional cash 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 a capital improvement.

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@DianeW777 

Thanks for the quick reply.  Yes, additional $$ was added to buy the exchange property in 2020.

The instructions in that article do seem to work for TT Premier.  I found that I could find a match in Premier for each step. 

If the instructions don't apply, then TT should really produce some since I see this is a common source of anguish for 1031 TT users.

Just to recap:

1. its okay to leave the refi fees in the cost basis.

2. Mark the date relinquished in TT2019 for both the relinquished property and the refi fees.

3. The Depreciation of the relinquished prop and the refi fees will continue on into TT2020, as if both still exist.

4.  A new asset will be created in TT2020 corresponding to the Cash added to buy the exchange property

How do you deal with the step-by-step interview in TT2020 when I get to the relinquished property.  Its no longer mine, but TT whats to attribute rental income to it.  Do I just mark it as 0 days of rent?

[DianeW777]

Your questions are repeated here for your convenience. Instructions will be listed below for TurboTax to assist you in the best entry method (using Step-by-Step instead of Forms).

Just to recap:

1. its okay to leave the refi fees in the cost basis. - Yes, you can leave them in the basis.

2. Mark the date relinquished in TT2019 for both the relinquished property and the refi fees. Correct.

3. The Depreciation of the relinquished prop and the refi fees will continue on into TT2020, as if both still exist. Yes.

4.  A new asset will be created in TT2020 corresponding to the Cash added to buy the exchange property. Correct.

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. Continue until you reach the Rental and Royalty Summary > Edit
3. Scroll to Assets/Depreciation > Click Update > Select 'Yes' I want to go directly to my asset summary > Continue
4. Edit beside each asset > Continue to the "Tell Us More 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)
6. Answer the question about whether it was 100% business > Enter the 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.
8. This completes the asset portion of the trade.

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.

Go back to your rental activity and then enter the new assets with the exact same information as the property given up with a new name, but with the same date placed in service 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.

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In the first section above, "update the original asset for the exchange", I get to step 4, and then I can't match the steps from there. There is no "Tell us More about the this rental Asset"
Its starts with "Review Information"
Then the next screen is "Did you stop using this Asset in 2019"
I click "YES"
Next screen is "Disposition Information"
It has the correct date for "Date of Sale of Disposition" and for "Date Acquired"
Continue
I never see a "Confirm Your Prior Depreciation" screen

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@DianeW777 

If I follow the instruction in the original article by Intuit, specifically Step 1, I think it achieves the same result, regarding the relinquished properties depreciation for TT2019, without have to transverse through TT's step by step screens.  Ultimately, its just the single entry to the date disposed, and then if I look at the Depreciation schedule that results, I see that TT2019 has prorated the depreciation for 2019 so as to include no depreciation after the date if was disposed of. 

The second step in that article also seems to properly generate the 8824 form.

What I'm confused about is how I deal with The relinquished property, the Refi fees, and the new asset in TT2020.  I have imported the TT2019 file, with deposition date change described above, into TT2020, and what I don't see is a Depreciation & Amortization report in the TT2020 forms section.   I tried the TT2020 Step-by-Step interview for the relinquished property, setting the rent to $0, and it does not generate the depreciation report...so that I can see it knows that the depreciation is to continue forward.

[DianeW777]

Yes, you are correct in regards to getting the same results.  I wanted to provide this easier step-by-step so that you can see it for yourself, it may or may not be easier for you and you do NOT have to do the process over.

Did you add the assets back to your rental activity? It seems this is what you may be missing from your comment: what I don't see is a Depreciation & Amortization report in the TT2020 forms section.  

• If you selected that the property was disposed of (sold, retired, traded, etc) then they are done or closed out so to speak in your return.  For this reason you must re-enter them like a new asset but with a new name ONLY -  the dates and  details as originally entered remain the same because the depreciation simply continues on.

  • TurboTax needs this to continue the assets, it doesn't automatically add them back after relating it to the trade. It may seem contrary.

The details of your trade will remain the same and so will the old assets, but they must be entered again to keep them going on the new property.

Keep all of your 1031 exchange information for the ultimate sale and/or another trade because you carry a tax free gain on the exchange until an ultimate complete disposition/sale with no trade involved. 

Please update if you have more questions.

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@DianeW777 

I have not added them in, because the relinquished property seems to be already imported in to TT2020 from TT2019.  I don't see the Loan fees.   

I'm wondering if I should delete the relinquished property, and then add in all three;  Loan fees, relinquished property, added $$$ for the exchange property?

When adding them in, how are the Loan fees and relinquished property characterized?   Meaning, its not a rental property anymore and there is certainly no rent be received.

[DianeW777]

First we must be clear about the use of the property received. Both properties must be held for use in a trade or business or for investment. Property used primarily for personal use, like a primary residence or a second home or vacation home, does not qualify for like-kind exchange treatment.  This means the property received must also be a rental activity (business use) or you must treat it like a sale and pay tax on any gain.

If the property received in the Section 1031 exchange is for rental activity use continue reading. Any rents received on the new property belong to the assets that you will list for depreciation  (now ALL assets are considered as the new property even though they continue on).

The relinquished property is and should still be there in 2020 because the trade did not complete until 2020.  Confirm there is only a small amount, if any at all, of depreciation for the the relinquished property, which would be correct due to the exchange.  The key is to confirm the correct amount of depreciation, without duplication, is being calculated for the year 2020 (on the old property asset which is also the new property asset - they are of course one and the same). 

If this is the case, then you should add the asset again as described above. You must now see this asset as the new property received in the exchange and it is no longer the property given up.  The same applies to the loan fees being amortized.

Lastly, you add the extra money used for the exchange as the third asset, placed in service in 2020.

[TaxFiller4]

I did 1031 exchange in 2018. Now, I am refinancing same 1031 exchanged investment property. I was under the impression that one should not cash out. I want to double check.

Below are my questions. 

1. Can I take cash out when refinancing without any tax implications impacting the 1031 exchange.
2. Can I include closing cost as part of loan, and thereby increase loan amount. Does that jeopardies 1031 exchange / tax wise. Or just my cost basis will go up.