1031 Exchange in 2024 - Turbotax Premier Windows 11 Does Not Recognize Deferred Capital Gains Tax

[semjeito]

I think I did things properly on Turbotax Premier for Windows 11 on my laptop but the result is freaking me out. Instead of roughly a $10,000 refund I should be receiving assuming the capital gains tax on a 1031 exchange is properly accounted for, the program is instead showing I owe the full capital gains tax (about $85,000) on the sale of an investment rental property even though I did a 1031 exchange to purchase a subsequent investment rental property within the proper time frame and within the rules. Quite clearly there must be something I'm doing incorrectly in the program.

Here are the details:

Property I gave up was purchased Apr 2021 for $469,000 (this has been the depreciation basis since then - no improvements since purchase). Has been fully used as a rental property since then. Sold it in Aug 2024 for $979,000. Net proceeds were $927,000 after commissions, fees, conveyance taxes, etc. Like Kind property was identified in Jul 2024 and purchase closed in Sep 2024. Purchase price was $975,000 but I ended up paying $983,400 with all fees, taxes, etc.
 

I noticed in filling out information for Form 8824 on Turbotax it asks for "Fair Market Value" for each property. What am I supposed to input there ? The actual sale and purchase prices -or- the amounts adjusted by fees, commissions, etc. ??? It also asks for costs associated with sale of the 1st property but does not ask for costs related to the purchase of the like kind replacement property. Seems strange.

Both properties were managed by the same company and as a result I received only ONE 1099-MISC covering rents for both properties together. In the Wages and Income / Rental Properties section I listed both properties with the proper in service and out of service dates. I also split the rents and operational expenses pro rata between each property. For the old property I also input the relevant data Turbotax is asking regrading it being sold and that's when all of a sudden my tax liability went from $10,000 refund to almost $75,000 owed to the IRS. It was after doing these inputs that I followed your instructions to search "like kind" which led me to inputs for a 1031 exchange. However, the $75,000 is still showing after inputting all of the information needed for form 8824. Clearly, either I'm doing something wring process wise or the software has a flaw. Please help !!! Thanks.

[DianeW777]

It depends on your entries. The steps below and information about the like-kind 1031 exchange are shown below.

The following guidance is how you enter a 1031 exchange in TurboTax and will provide guidance for the current and new assets for depreciation.

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
• IRS Instructions for Form 8824

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.

@semjieto

[Edited: 03/29/2025 | 5:51 AM PST]