1031 exchange...depreciation...grantor letter & more

[AnitaMargarita]

We completed a 1031 exchange in late November 2021. We sold a fully depreciated duplex townhouse (one side rented from 1979; the other from 1984).  The new properties are a very small portion of 1)luxury apartment complex in Illinois and 2)family apartment complex in Virginia.  I pretty much ignored the tax docs we received from them for the five weeks we owned them in 2021 so I am considering amending the 2021 returns.  I did put the properties in with the cash value we had put in each so Turbo Tax generated depreciation which I don't think is correct now.  1)For Property 1 we received a Grantor Letter which includes an allocation of operations showing rental revenues and expenses (which includes Depreciation for Land Improvements and Depreciation for Building).  2)For Property 2 we received tax docs of a 1099-MISC and a 1098 Mortgage Interest Statement plus a copy of the overall balance sheet. I realize now that I also need to file an Illinois return for Property 1 and a Virginia return for Property 2.

My question is will I have a depreciation I calculate from any remaining from the exchanged property in addition to what the Grantor Letter mentions in their expenses?  Property 2 tax forms doesn't mention depreciation so again is this depreciation that I calculate to be included?

Thanks for any clarification.

[MaryK4]

Yes, you will have to amend your 2021 tax return so that you have the correct depreciation basis to use in 2022.  To clarify, did you enter the Like-Kind Exchange on your 2021 tax return?

[AnitaMargarita]

Yes, I did enter the like kind exchange on our 2021 return.

Another problem I will have amending the 2021 return is that I changed to a new computer. While I have my CD to reload Turbo Tax, I don’t have the 2nd state to download and Turbo Tax gives me an error when I try to open the 2021 to start an amended return. Any ideas on this, too?

[MaryK4]

When you did the Like-Kind Exchange, it should have rolled into the depreciation on the new properties, but you would have to see what was reported on the return- it does sound like the information needs to be corrected to add the additional information.  Unfortunately, unless you can find the .tax files on your computer (if you have access to your old computer or if you transferred the files from the old computer to the new computer), you are going to have to re-enter everything in TurboTax EXACTLY as you filed it before you can do the amended 2021 return.  If you do not have a pdf copy, you can get a transcript from the IRS. (See Get Your Tax Record)

As an alternate, you may be able to enter the 2021 information in TurboTax and manually enter the information on the 1040X.

@AnitaMargarita 

[AnitaMargarita]

@MaryK4. Thanks for your response. I have the .tax file. I have reloaded Turbo Tax 2021 from purchased CD, but I had two states (one free, one I downloaded from TT). I don’t have the downloaded one so Turbo Tax gives me an error. I don’t want to have to buy the download again, but it looks like I may have to to be able to amend the file. 
Still don’t understand the depreciation answer though. 
Will muddle, google, and question more today. Thanks. 

[GeorgeM777]

To follow-up on the comments from @MaryK1101, determining the prior depreciation is important because you will need it when you begin your analysis of this 1031 exchange.  For example, the analysis begins with the following: 

In computing the amount of gain recognized in an exchange of multiple properties, the fair market value must be determined for each property transferred, and for each property received.  Moreover, the adjusted basis must be determined for each property transferred.  

Thus, based on the above, you need to determine the adjusted basis for the property you are transferring and in order to determine the adjusted basis, you need to know the depreciation.

You mentioned in your post that you will continue to research 1031 exchanges.  You might consider reviewing the Treasury Regulations for 1031 exchanges, specifically this section § 1.1031(j)–1 Exchanges of multiple properties.  This site is very helpful because it provides examples.  Here is the link to that Treasury Regulation.  

Treasury Regulations Involving Multiple Properties

The above is a long document but the section on multiple properties begins at page 92.  

Cornell Law School has reproduced the same regulation and can be accessed at the below link.  The Cornell site is easier to read and it contains the same information as the Treasury Regulation site.

Cornell Law School_Exchanges of Multiple Properties.

One last point, because this is a multiple property exchange, you will need to attach a statement to your return showing your calculations.  Only the final numbers appear on Form 8824.  In other words, you can't enter an exchange of multiple properties in TurboTax.  Rather, when you have prepared your final numbers, you will go into Forms mode in TurboTax (which you can only do using TurboTax CD/download), and manually enter your numbers on Form 8824.  Your completed return will need to be mailed to the IRS.  When are you have completed your calculations, reach out to us again if you need further guidance.  

@AnitaMargarita 

[AnitaMargarita]

Thanks, GeorgeM777. Quick question. We received a 1099 and 1098 on one of the properties. The property is in both mine and my husband's name, yet Turbo Tax doesn't have a button for BOTH when entering the 1099-Misc.  Should I split the amounts showing on the 1099-Misc and enter a 1099-Misc for my husband and a 1099-Misc for me? Or just enter it in one name? Same for the 1098?

I did all the calculations last year for the two 8824 forms. I found that spreadsheet and it definitely shows I have a much smaller cost basis than what I used on our 2021 return (hence the need for the amended return). I want to get it right so that I'm not compounding a problem! Thanks for the references you mentioned. I'm beginning to get a much clearer picture of the process.

[AnitaMargarita]

Thanks, GeorgeM777. Quick question. We received a 1099 and 1098 on one of the properties. The property is in both mine and my husband's name, yet Turbo Tax doesn't have a button for BOTH when entering the 1099-Misc.  Should I split the amounts showing on the 1099-Misc and enter a 1099-Misc for my husband and a 1099-Misc for me? Or just enter it in one name? Same for the 1098?

I did all the calculations last year for the two 8824 forms. I found that spreadsheet and it definitely shows I have a much smaller cost basis than what I used on our 2021 return (hence the need for the amended return). I want to get it right so that I'm not compounding a problem! Thanks for the references you mentioned. I'm beginning to get a much clearer picture of the process.

[AnitaMargarita]

Nevermind about the question regarding 1099. I see that the person whose SSN is used on the 1099 is the one who gets the form.   ; )