1031 exchange of rental properties--carry over depreciation to new property?

[sunm98tt]

Hello DianeW777,

thank you so much for your reply, it makes sense to do the two-schedule depreciation this way. I guess I’m only struggling about the double counting of depreciation if I take it for both the relinquished property and the replacement property for the same period of time. Should I not take the depreciation at all for the relinquished property this year? This way, at least I’m not doubling for the period I held the old property. There is still one issue, I gave up the old property on 5/21, and acquired the new one on 6/29. If I take the whole year depreciation for the old property, how do I deduct the period when I didn’t have either property? Also, for the calculation of adjusted basis of old property, should I include what would have been the depreciation amount for the old property for the period of time I had the property (1/1 to 5/21)? Lastly, the additional cash or fund paid in the exchange, I calculated as FMV of new property + exchange cost - FMV of the relinquished property. Is this correct? Thanks again!

[Anonymous_]

@sunm98tt You might want to read through the article at the link below; the two-basis approach is cumbersome.

https://www.journalofaccountancy.com/issues/2008/nov/depreciatepropertyinlikekindexchangesconsistent...

[sunm98tt]

Thank you, Tagteam! I did read the article from your link. It’s clear that for deferred exchange (the replacement property is not acquired until after the disposition of the relinquished property), you can not take depreciation during the period between the disposition of the relinquished property and the acquisition of the replacement property. For me it’s between 5/21 and 6/29, a little over a month. I just don’t know how to manually adjust the depreciation to reflect this on TT. According to JARoberts Think57 and DianeW777, I can carry over the depreciation schedule of the relinquished property by inputting the original data from that property onto the new property, just rename it to reflect that it’s from a carry over basis. I can choose not to depreciate for the old property, therefore eliminate the double counting for the two properties, but the period between the disposition and the acquisition is still depreciated in this calculation. I just need to find a way to somehow deduct this period’s depreciation. Thank you!

[Sintaxed]

I too have been wrestling with the HOW portion of this issue for a while now.  Here's what I am thinking of doing.  Open to feedback on this idea:

Rental A has been depreciating for 10 years.  I sold it in 2020 via 1031 Xchg but bought a lower priced replacement property (I have no issue with paying a little boot).  My thought is to simply rename the Schedule E name for the relinquished property to "999 Elm - LKE - to 555 First" but leave the depreciation schedule as it was, but add a line item to represent the remodel costs incurred to start up the the new rental (555).  Then create a new Schedule E item called "555 First" but only use it to track the income and expenses (no depreciation) for the new property.  Since I received partial year rents for each property, I can then put them under their respective Schedule E columns.  But when I get to 2021 Tax Year, I think I can simply eliminate the new 555 entry from Schedule E - and enter all rents and expenses on the original  999 Elm - LKE - to 555 First Schedule E column - but rename it simply to "555 First".  This seems to me to retain all existing depreciation schedules, allow me to add the new schedule for the initial remodel, and keep the rents segregated in the 1 year where I have both.  Thoughts?

[Think57]

Hello SUNM98TT.  Will try to answer your question.  This is how I see it, though am far from being an expert on this.  Believe you can call the Turbo Tax Helpline and see if you can get a CPA or Enrolled Agent to help you.  Interested in hearing from anyone if the below sounds correct or not.  Hope this helps.

1)  You will need to count the depreciation for your relinquished property's assets and include those in your Schedule E and the Adjusted Basis Basis calculations for the relinquished property

2)  You get the depreciation for the relinquished property by putting in the sold date of 5/21.  TurboTax automatically calculates the depreciation for you.

3)  OK, here is where the fun begins. Using the Asset Entry Worksheet ...

  a)  Calculate the what the depreciation would be for the asset if you had not sold the property.  Can do this by taking out the sold date that you entered in the Turbo Tax asset entry sheet

  b)  Have Turbo Tax calculate what the depreciation would be if you put in the sold date of 6/29

  c)  Then, Full Year Depreciation less Depreciation from Jan 1 thru Jun 29 = Depreciation from Jun 20 thru Dec 31st.  At least it seems to for me.

  d)  Remember to put back in the correct sold date of 5/21 for the Relinquished Property

4)  For your Replacement property, create the "carryover" asset with the original data that matches the data for the Relinquished Property.  In the Asset Entry Worksheet  ...

  a)  For Prior Depreciation, put in the depreciation taken through 2019 (should be the same as for the Relinquished Property)

  b)  For Depreciation Deduction, do an override and enter the number that you calculated in step 3c above, the depreciation amount for June 20 through Dec 31st

  c)  Regarding the AMT numbers in the Asset Entry Worksheet, because we are not close to any AMT issues, we use the same numbers as those in step 4b.  You will have to figure out what you want to do for yourself regarding the AMT numbers.

5)  The gotcha if you fall asleep!  When you do your 2021 taxes, you need to make sure to get the PRIOR DEPRECIATION correct for the "carryover" asset.  Because Turbo Tax will ONLY carry forward the depreciation from the Replacement Property "carryover" asset.  You will have to manually add the 2020 depreciation for the asset from the Relinquished Property from Jan 1, 2020 through May 21, 200, to the depreciation for the "carryover" asset that Turbo Tax carried forward from Replacement Property to get the correct Prior Depreciation for that "carryover" asset for your 2021 taxes.  I do that manually outside of Turbo Tax in a spreadsheet and then enter the number in the Asset Entry Worksheet's Prior Depreciation field.  Turbo Tax will then calculate the asset's depreciation for 2021.

Good luck to us all!

[sunm98tt]

Hello Think57, appreciate your reply. I think your way of calculation really makes sense to me. Step 3c to calculate the right depreciation amount for the replacement property is creative and makes a whole lot of sense. Now for step 4b, to do the override, do I need to call TT helpline and ask them to do it? 
Thanks for the reminder about adding back the depreciation for relinquished property in 2021 “prior depreciation”.

[Think57]

Hello SUNM98TT.  I use TurboTax locally on my PC and by right-clicking on a field, am able to bring up a list of options to choose form that includes "Override".  If you are using the online version of TurboTax, not sure what you would do. 

Good luck

[sunm98tt]

Hi Think57, that explains. I am using the online version, and don’t see the override option, unfortunately.

Thank you for your help! I learned a lot!

[sunm98tt]

On a second thought, maybe I should use the PC download version this year so I can do manual override.

[WendyN2]

Yes, you definitely want to make sure that you are able to input the correct information for a 1031 Exchange and not risk losing the benefits! 

As I think you know, one big benefit of a 1031 exchange is that it resets the depreciation clock. You'll be able to buy a new property and take advantage of depreciation to offset your income. This can really add up if you're selling a property that you've held for more than two decades. If you sell an investment property for more than its depreciated value, you will probably have to recapture the depreciation.

This normally results in the amount of depreciation included in your taxable income. A 1031 exchange avoids taxes on this amount that may exceed the official capital gains.

Here is a really good resource for 1031 Exchanges! I hope you find it useful and interesting!

1031 Exchange Rules: How To Do A 1031 Exchange In 2021?

[split]

In my case, I sold the relinquished property at the end 2019 and acquired the target property at the beginning of 2020.    I used TurboTax 2019 and completed form 8824; "like kind exchanges".

Now TurboTax 2020, seems to have no clue about the exchange.   Its seems that most people were fortunately enough to deal with both end of the exchange in the same tax year, I'm a bit lost as how to proceed.

[Anonymous_]

@split 

How to proceed should probably involve finding a qualified tax professional. 

Form 8824 is typically prepared and filed in the same tax reporting year in which the relinquished property was transferred/sold.

[Think57]

Hello Split.  I have read in posts in the Turbo Tax community that TurboTax may have a way (or ways) to link properties, but have never have tried to do it myself.  In my opinion, the fact that you sold in 2019 and replaced the sold property in 2020 is inconsequential in regards to what you have to do.

Believe that main issue you are facing is the carrying over of the depreciation from the relinquished property to the replacement property.  There are two acceptable ways to do this that I am aware of, and regardless of which one you choose, if the properties are not linked, then you will have to manually create all the assets you were depreciating for the relinquished property for the replacement property.  The depreciation schedule for each asset will be determined by which method you decide to use to depreciate the carried over assets.

Hope this helps.

[split]

This is all about getting TT to deal with the 1031 and the depreciation.  We know what we want TT to do, its just getting TT to correctly do it.

To that end I found a very good step-by-step written by intuit.  It has 3 major steps, all went well for me until I reached Step 3.

Here is the article:

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

To me, Steps 1 & 2 belong to the relinquished property and belong in the filing year the property was relinquished.(for me = 2019)

Step 3, relates to the exchange property and should go in the filing year the exchange property was acquired???(for me = 2020)   And that is the way I have been proceeding

The snag I have hit is Step 3, part 2:  in Schedule E worksheet, "click on the QuickZoom to the Asset Entry Worksheet", ..... it does not exist.  There is no Quickzoom button, at least not in my 2020 TT premier desktop.   So how do I create this "Asset Entry Worksheet"?

[Anonymous_]

The Asset Entry Worksheet (or worksheets) is directly beneath the Schedule E Worksheet in your Forms List. The worksheet is created when you enter an asset that is to be capitalized.